BOI’s interest rate increase will cause problems for the housing market – experts

Following the rise of the Bank of Israel’s interest rate, experts predict trouble for the future of Israel’s real estate economy.

An Israeli flag flutters outside the Bank of Israel building in Jerusalem (photo credit: REUTERS)
An Israeli flag flutters outside the Bank of Israel building in Jerusalem
(photo credit: REUTERS)

The dream of owning a home one day seems to be inherent to the human experience; people from all over the globe work tirelessly to carve out their own little corner of the world. In Israel, such a desire is likely to stay in dreamland for the time being, following yet another steep increase in the Bank of Israel’s interest rate.

On Tuesday, the Bank of Israel (BOI) raised its interest rate by 0.75% to 2% in order to combat the country’s rising inflation, which recently exceeded 5%. The increase is the bank’s largest in 20 years, and while such a move is sure to affect many facets of Israel’s economy, experts have spoken up about the particularly significant impact this will have on the real estate market.

“The BOI has once again raised the interest rate at a sharper rate than prior forecasts, and thus given further foundation to the assumption that real estate has become a desirable product only for the rich,” said Doron Ariel, chairman of the National Banking and Finance Committee of the Israel Bar Association.

What should be expected?

Ariel pointed out that the interest rate increase will be reflected in an addition of up to thousands of shekels per month for mortgage holders and, in concert with the recent 17.8% increase in housing prices, will make it even more difficult for young couples to purchase real estate. “The move will … strengthen the trend of the increase in rents,” he noted.

 Doron Ariel, chairman of the National Banking and Finance Committee of the Israel Bar Association (credit: ZVIKA GOLDSTEIN) Doron Ariel, chairman of the National Banking and Finance Committee of the Israel Bar Association (credit: ZVIKA GOLDSTEIN)

“The BOI has once again raised the interest rate at a sharper rate than prior forecasts, and thus given a further foundation to the assumption that real estate has become a desirable product only for the rich,”

Doron Ariel, chairman of the National Banking and Finance Committee of the Israel Bar Association

A huge factor in the increase in rent and housing prices around the country is due to a lack of available homes. “Without the State of Israel announcing the establishment of two new cities from scratch in the north and the south, each in advance for half a million inhabitants, and with state loans for the young couples who will buy there, the housing crisis will intensify and, in a few years, we will miss the current situation,” warned Ariel.

According to Yaron Spector, owner and CEO of Yaron Spector Real Estate Appraisal, the bank’s decision to raise its interest rate could shift demand from buying to renting. “The high interest rate will lead a significant portion of real estate buyers to look for alternatives, and push them into the rental market,” he said.

If true, this could lead to a steep raise in the already high cost of renting in Israel. “Buyers will tell themselves that instead of paying a mortgage of 7,000 shekels a month and risking an additional price increase later, they prefer to pay the same amount in rent – something that will lead to an increase in demand for rentals and an increase in rental prices,” explained Spector.

“If they still prefer to purchase an apartment, they’ll suffer a price increase of hundreds of shekels in their monthly mortgage repayments,” he concluded. “In that sense, the buyers are harmed no matter what their decision is – if they buy or if they rent.”