BoI mulls steps to cool housing market

Prices have risen by 2.2 percent in May and by about 22% in the last 12 months.

September 6, 2010 23:48
2 minute read.
House built by Benjamin and Rosa Kukia and today o

Kukia house 311. (photo credit: Shmuel Bar-Am)


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The Bank of Israel is contemplating more measures to stem the sharp increase in housing prices and dampen demand.

“In light of the persistent trends in the housing market, further... measures might be needed in this area,” according to the minutes of the central bank’s interest-rate meeting for September, which were released Monday.

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“The rapid increase in house prices was continuing, and prices had risen by 2.2 percent in May and by about 22% in the last 12 months.”

The Bank of Israel expects house prices to increase more moderately in the coming year. Nevertheless, there had been a smaller slowdown in the rate of increase in house prices than had been expected, the report said.

Concerned about an emerging housing bubble, the Bank of Israel decided to use macroprudential instruments to moderate the rise in house prices. In July, it directed banks to examine their housing-credit portfolio and to make extra loan-loss provisions for housing loans in which the leverage rate exceeds 60%. In effect, the new regulations for mortgages make loans more expensive for home buyers seeking a mortgage of more than 60% of the property’s value.

“In July, the loan-to-value ratio of loans for house purchases rose slightly, while the number of new mortgages was at a high level, albeit some 10% lower than the peak level it reached in June,” the report said.

“From the aspect of borrowers’ repayment ability, there had been no significant change in the risk.”

Although there had been an increase in the number of building starts and in investment in housing, it was not keeping up with the increase in demand, the report said.

In addition to the effect of short-term interest rates on housing prices, the decline in medium-term and long-term interest rates related to the decline in interest rates around the world is reflected in the reduction in the cost of financing house purchases, thereby boosting demand, the report said.

There was unanimous support for keeping the interest rate unchanged at 1.75% for September, the minutes said, in light of concern over the extent and strength of the global economic recovery, especially demand for Israeli exports, and uncertainty regarding the expected rate of economic activity.

Inflation in the last 12 months was 1.8%, slightly above the midpoint of the target inflation range of 1% to 3%, despite the rapid rise of 5.6% in the housing index in that period. The inflation rate excluding housing was 0.8% in the last 12 months. Private forecasters expect the rate of inflation to remain at about its current level until the end of 2010, and to rise close to the upper limit of the target range by the beginning of 2011.

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