Rising property prices and the expectation of higher interest rates could hurt home owners’ ability to make their mortgage payments, Supervisor of Banks Rony Hizkiyahu said Wednesday.“There is a risk inherent in current property prices,” he said at The Marker Capital Market Conference in Tel Aviv.“When we discover a problem that has not yet fully developed, it is time for us to act to avert a crisis.“The low mortgage-interest rate environment is creating a delusion about the ability of borrowers to repay loans. Since most mortgages are linked to variable interest rates, the big question is what will happen when the interest rate rises – and it will rise.” This is the reason the Bank of Israel announced directives to cool down the booming realestate market, Hizkiyahu said.They are part of the central bank’s supervision policy to strengthen the financial system in general, and the banking sector in particular, before crises arise, he said.The new regulations make loans more expensive for home buyers seeking a mortgage of more than 60 percent of the value of the property.“We have seen a rapid rise in property prices over the past two years,” Hizkiyahu said. “A bubble occurs when prices rise above their true value and are detached from basic factors of the economy.“One of these factors is rental prices. Lately we have been seeing a form of ‘disconnection’ in the rental-property market.“According to economists and analysts, we are not talking about the formation of a bubble, but the direction is worrying and we need to be cautious.” Property prices have risen 22% over the past year and 30% over the past two years. At the same time, demand for real estate, especially for investment purposes, has increased.“The supply of housing and volume of new construction starts are not enough to satisfy high demand,” Hizkiyahu said.Overall housing credit has risen by 15%, while bank credit in general has fallen, he said.Hizkiyahu said he was concerned that 84% of mortgages issued in the first quarter of the year were shekel-linked at variable interest rates, which means that monthly repayments will vary any time the Bank of Israel adjusts its benchmark interest. Since interest rates are expected to rise, it would be more difficult for mortgage holders to make their monthly payments, he said.Despite efforts by the Housing and Construction Ministry and the Israel Lands Administration to boost the supply of housing through the release of land tenders over the past 18 months, there has been “no significant change” in the situation and the sector continues to suffer from a shortage, the Bank of Israel said in a report Wednesday.“The marketing of land tenders and permits for construction approved by the Israel Lands Administration are expected to have an effect on the supply of housing only in two years time,” the report said.“The demand for residential housing is continuing to rise, probably boosted by low mortgage interest rates and despite an increase in the base lending rate in the reported quarter.The inability of the supply side to satisfy demand is reflected in the continued surge in real estate prices, although at a slower rate than in the previous two quarters.” The Bank of Israel has raised its benchmark interest rate from 1% in January to 1.5% in April.