While economists debate whether Israel is caught in a real estate bubble, the numbers leave little room for doubt. Latest statistics show that the average scope of a mortgage in the Central region has soared by 55 percent since January and now stands at an unprecedented NIS 620,000. In more outlying areas the increase is a whopping 57 percent, for an average mortgage of NIS 550,000. The average mortgage for what's vaguely defined as a luxury flat is NIS 1,250,000.
In January 2008, by contrast, an average mortgage in central Israel was for some NIS 400,000; in the periphery, it was NIS 350,000.
Israel has not experienced the subprime mortgage woes that so shook America. And what may be looming here cannot be compared to the consequences of the profligate practices of Freddie Mac and Fannie Mae. Nevertheless, there has been a worrying departure from previous commonsense practice, and this may trigger chain reactions along the American pattern, even if not as severe.
Massive mortgages were once almost unknown in this country. Mortgage lenders were traditionally tightfisted, conservative and hyper-regulated. Obtaining any mortgage, never mind one of vast proportions, was never simple. But now conditions have eased, dangerously.
Current low interest rates have made big mortgages temptingly affordable. Many of the individuals and families who are taking them may feel invulnerable, but they are putting their financial security at considerable risk by borrowing more than they may be able to repay. Their confidence that home prices can only rise may be misguided. Their assumption that interest rates will stay this low is emphatically misplaced.
Real estate prices rose by 25% in the past nine months, while interest rates plummeted to a historical rock bottom. These are the classic ingredients for a crisis. Low interest lures borrowers. They receive hardly any return on their savings in any risk-free framework, but can finance a home purchase via an attractive loan. It all seems safe as houses. But are the houses safe?
WHAT IF real estate prices go south? Purchasers would find themselves paying off colossal loans on homes of depleted value. Lenders would end up with inadequate collateral.
What if interest rates rise? The rate on many mortgages is not fixed, and is invariably linked to benchmark rates or the cost-of-living index. Rising rates would send monthly mortgage repayments soaring.
And what if unemployment remains high? Despite plenty of upbeat chatter, and some concrete indicators of improvement, neither the global nor the local economy is entirely out of the woods. A household with median income may find itself in enough trouble paying back loans if interest rates spike, but a fall in income or the loss of a breadwinner's job would constitute a domestic economic nightmare.
Not too many years back, sensible young couples took manageable mortgages and, if necessary, made their homes outside the most expensive neighborhoods. Today, many are taking mortgages of well over NIS 500,000 in order to live in more attractive areas, while plenty of more established households have mortgage loans of twice that size. Once, a mortgage whose value reached 30% of the cost of an apartment was deemed substantial, if not excessive. Today two-thirds isn't uncommon. A 15-year mortgage was long by the prudent criteria of yesteryear. Today 25-year loans are common.
These changes mean rising dependence on mortgage banks, less saving, and less security should the marketplace change. And while demand has almost always far outstripped supply in attractive neighborhoods, elsewhere the current rush on real estate could well create a surplus of available housing which will drive prices down.
Israel's home buyers might not be overextending themselves quite as grotesquely as some of their American counterparts did, but they are headed in that general direction.
At the very least, the comptroller of banks should help cool the mortgage craze by advising against linked rates and by making sure that bankers take exceptional care to explain all loan terms and attendant risks to their clients - spelling out the possible scenarios for rising repayment rates and falling property values, and ensuring that borrowers will be able to cope if there is a downturn.
This isn't only a matter of overeager banks and over-impulsive clients. As the subprime crisis in the United States made crystal clear, the country's economic well-being is at stake.