BoI warns of surge in housing prices

In high-demand cities such as Tel Aviv, Jerusalem, Netanya and Beersheba, the average prices for four-room apartments were unchanged in the third quarter compared with the previous quarter.

November 9, 2010 07:19
3 minute read.
Sales of brand new homes dropped 5% in the first q

construction tel aviv 311. (photo credit: Ariel Jerozolimski)

Housing prices could continue to increase due to a slow rise in the supply of houses, according to the Bank of Israel.

“There are pressures for continued increases in housing prices,” the central bank said in the minutes of its interest-rate discussion for November that were published Monday. “The persistent increase in housing prices and the growth in credit for housing purchases, due in part to the low interest rate, necessitate the introduction of measures to counter these trends, which are expected to increase the rate of interest on some loans for housing purchases and thus gradually to moderate the increase in housing costs.”

Over the past year, housing prices continued to increase against the background of the rapid increase in housing credit, the minutes said. For this reason, the central bank at the end of October issued draft directives to the banks instructing them to increase their capital provision for housing loans at floating interest rates with high loan-to-value ratios, in which the loan represents more than 60 percent of the value of the property. In practice, the directive makes larger mortgages of over NIS 800,000 more expensive.

“The rise in housing prices can be explained by the slow response of the supply of houses, together with the effect of the low interest rate,” the minutes said.

Over the past three months, the rate of increase of this credit had slowed somewhat, but there still were pressures for continued increases in housing prices, the minutes said.

In the discussions on the interest rate for November, all the participating members of the central bank’s management recommended that the governor keep the rate unchanged at 2%, in light of the decision to introduce a further macro-prudential measure with regard to housing finance and its implications for inflation, and in light of the indications of a slowdown in growth.

Housing prices, which are not included in the consumer-price index and which are taken from the Central Bureau of Statistics survey of housing prices, increased by 1.3% in July and August, compared with June and July, and faster than their increase of 0.7% in June-July relative to May-June.

Housing prices have increased 18.9% over the past 12 months and 9.7% since the beginning of the year.

The volume of new mortgages granted in September decreased 30% compared with August, to NIS 3 billion, with all types of mortgage showing reductions.

“It should be noted that there is an element of seasonality in these figures, and in September last year there was a sharp 17% drop in new mortgages compared with the previous month, apparently due to the period of the High Holy Days,” the minutes said. “The decline this year occurred despite the fact that the interest rate on floating-rate mortgages (indexed and unindexed) did not change and despite the reduction in the interest on fixed-interest indexed mortgages.”

The housing component in the CPI, which reflects the costs of housing rentals and accounts for about 20% of the total CPI, increased 0.7% in September and 5.6% since the beginning of the year.

Separately, a survey published by the government assessor on Sunday showed that nominal prices of four-room apartments increased an average of 2.4% in the third quarter of 2010 compared with the second quarter and by 15% compared with the same quarter last year. The survey, which compares the average price of four-room apartments in 16 cities, found the sharpest surge in Ashkelon (7%), followed by Nahariya (6%) and Hadera (5%).

In high-demand cities such as Tel Aviv, Jerusalem, Netanya and Beersheba, the average prices for four-room apartments were unchanged in the third quarter compared with the previous quarter.

In Herzliya and Petah Tikva, prices declined 1%.

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