Bank of Israel tightens conditions for large mortgages

Banks supervisor: The guidelines will affect up to a fifth of home loans, steps intended to have impact on demand side of housing market.

beersheba real estate 311 (photo credit: Courtesy)
beersheba real estate 311
(photo credit: Courtesy)
In another effort to stem the surge in property prices and prevent the creation of a “housing bubble” that might eventually lead to a crash in prices, the Bank of Israel on Monday issued a directive that will make most mortgages of over NIS 800,000 more expensive.
“The new guidelines were introduced in light of a continued surge in house prices over the past years and the growth in housing credit that exceeds increases in average household income,” Supervisor of Banks Rony Hizkiyahu said, in a telephone interview following the announcement.

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“The steps we have been taken over the past year, including the new guidelines, are intended to have an impact on the demand side of the housing market and affect a specific part of the population and not the market as a whole.
“But this will not be enough,” he said. “To have a real impact on housing prices the supply problem in the property market needs to be tackled through the release of land tenders and cutting of construction time.”
Hizkiyahu added that over the past year until August, property prices had surged by 19 percent.
“Developments in the housing market resulted in an ongoing increase in the housing credit portfolio, in particular in the share of credit granted at floating interest rates, and in the size of the average loan,” Hizkiyahu said. “Hence as the interest rate increases, the borrowers’ rate of repayment is expected to increase.
“Buyers who take out a floating- interest loan in a low-interest environment cannot expect to pay interest of 2% forever. We are only advancing interest rate increases that will happen anyway.”
The new directive will not apply to mortgages that were less than NIS 800,000 when issued. Nor will they apply to loans received by those entitled to housing benefits under the criteria determined by the Construction and Housing Ministry.
In practice, it means that mortgage conditions will be tightened for buyers of properties that cost over NIS 1.3 million who take out floating-interest loans.
More specifically, the guidelines require banking corporations to increase their capital provision for floating-interest-rate housing loans granted starting from October 26, 2010, in which the loan represents more than 60% of the value of the property, and the ratio between the floating-interest rate part of the mortgage and the total sum of the mortgage equals or exceeds 25%.
Loans in this category, in which capital requirements were weighted at 35% or 75%, respectively, will be weighted at 100% from this date.
“As a result, according to our calculations, the annual interest rate on mortgages that fit into the category of the new guidelines will rise by about 0.5%. However, the increase may vary from one bank to another,” Hizkiyahu said. “We estimate that the directive will have an impact on 15% to 20% of mortgages.”
The most recent data from the Bank of Israel, as of August, shows that 50% of all mortgages are issued for up to 60% of the value of the property, and 10% to 20% for up to 70% of the asset value.
In June, the volume of mortgages reached a peak, and in September there was a significant decline of 30% compared to June.
“It is too early to speak of a change in trend, since September was the month of the High Holy Days, with fewer work days,” Hizkiyahu said. “But in recent months we are seeing a decline in the demand for mortgages for apartments bought for investment.”