'Don’t pay 30% above 2008 prices for a home'

Hizkiyahu: “We are seeing a certain slowdown in the pace of increase in property prices in recent months."

Hizkiyahu 311 (photo credit: Israel Hadari)
Hizkiyahu 311
(photo credit: Israel Hadari)
Home-buyers who paid more than 30 percent above the prices of two or three years ago will be in trouble once prices start to fall again, the Bank of Israel’s outgoing supervisor of banks warned on Tuesday.
“We are seeing a certain slowdown in the pace of increase in property prices in recent months, but they are still continuing to rise. It is still too early to speak of a change in trend,” Rony Hizkiyahu said at a press conference in Tel Aviv on Tuesday.
“Mortgage rates will continue to go up as the interest rate increases. Therefore, whether there is a change in the cost of mortgages of half a percentage point in one direction or the other should not be the focus of what should worry the public, since this is bound to happen anyway.
What needs to worry the public is how much they are paying for apartments.
If they are paying more than 30% above the market prices of two or three years ago for a home – this is a major problem. At some point prices will explode and come down.”
Hizkiyahu, who called the press conference to mark the end of his four-year term at the end of the month, added that the sharp surge in property prices was not created by the central bank, but that the steps it is taking are intended to avert a housing bubble burst, which could leave a lot of people in trouble.
“There is an incredible increase in prices in recent years and we need to slowly neutralize the situation and release the air in a moderate and careful way,” Hizkiyahu said. “We are seeing that the risk in the credit market is growing and requires attention. Any mortgage looked at individually might be conservative and sound, but the accumulation of risks in the market as a whole could cause a problem.”
In recent months the central bank has introduced a number of steps to tighten conditions for large mortgages, in an effort to reduce the demand side of the housing problem. Back in October, it issued a directive to the banks with guidelines that will make most mortgages over NIS 800,000 more expensive.
“The measures we are taking are limited to dealing with the demand side of the housing market and are intended to give the government a time window to act to boost housing supply. They are minor steps aimed at slowing down rather than halting the market,” said Hizkiyahu. “Once there is a balance between supply and demand we will not need to intervene.”
When asked whether the central bank was considering additional measures, he said that there was no need to take more drastic steps unless there are signs of a burst bubble in the housing market and a crisis approaching.
“There are tools at our disposal which at the moment we are choosing not to make use of,” he said.
Looking back at his four-year term, one of the highlights for Hizkiyahu was the way Israel dealt with the global financial crisis.
“We understood very quickly the magnitude of the crisis and intervened actively to ensure proper and tight supervision of the banks,” he said. “The crisis in Israel was not wasted, rather the opposite, we used it to tighten and not ease regulation.”
Hizkiyahu is taking much of the credit for the soundness of the country’s banking system, especially during the credit crisis. Under his leadership the central bank took a number of measures, including tightening supervision of the banks’ foreign risky assets and raising the banks’ capital adequacy ratios.
“We found that we have a very profitable banking system, which enjoyed four or five years of rapid growth,” Hizkiyahu said. “We launched a plan to strengthen the banking system with a view to the future. We set a capital adequacy target of 12%, which together with the adoption of Basel II [the New Basel Capital Accord of the Basel Committee on Banking Supervision], created an infrastructure for dealing with future crises.”
Looking ahead, Hizkiyahu pointed to a number of challenges including the implementation of the capital requirements and costs involved in putting in place new heavy regulation imposed by Basel II and later by Basel III.
“There is a certain recovery in global markets, but it is very slow,” he said.
“We need to be careful and aware of the risk-impact the slow recovery is having on investments abroad, the banks’ customers exposure abroad and exporters.”
Hizkiyahu will be replaced by his deputy Dudu Zaken, who joined the Bank of Israel about 20 years ago.