House prices increase at slower pace

No sign yet of a change in trend, says Bank of Israel.

nazareth real estate 298 (photo credit: David Zeitler)
nazareth real estate 298
(photo credit: David Zeitler)
Despite first signs of a moderation in the pace of spiralling house prices, the Bank of Israel cautions that it is too soon to assess whether this is a change in trend.
“Before an assessment can be made as to whether the trend in house prices has changed, developments in the coming months will have to be reviewed,” the Bank of Israel said in the minutes of the discussion before the interest rate decision for October published on Monday. “The recent increases in the Bank of Israel interest rate, together with the increase in building starts (compared with the equivalent period a year ago) are likely to help moderate the rise in house prices.”
At the discussion meeting late last month, all central bank participants recommended that the base lending rate for October be raised by 25 basis points (0.25 percent), to 2%, due partly to a steep increase in house prices and housing loans. The central bank noted, though, that according to the latest information from the Central Bureau of Statistics, the rate of increase in house prices had moderated to a rise of 0.7% in the June to July period compared to 2.2% in the months May to June, a slower pace than that of the last year and a half. In the 12 months to July, house prices have increased by about 20% against the background of the rapid expansion in housing credit reflecting the low rate of interest, and the relatively slow adjustment of the supply of houses.
There were about 37,000 building starts in the 12 months to June, compared to about 33,000 in the equivalent period a year earlier, representing an increase of about 12%.
“House prices are still increasing steeply, and housing loans continue to expand rapidly, reflecting the low rate of interest and the slow adjustment of the supply of houses,” the report said.
“Housing prices (which are measured by rentals and are included in the CPI) increased by a rapid 1.7% in August, and by 6.1% in the last 12 months – reflecting an acceleration in the rate of increase in the last few months. Housing prices were expected to continue increasing rapidly in the coming months. The housing component of the CPI, mainly based on renewed rental contracts, is still rising, at an even slightly faster pace than in recent months.”
Following a temporary fall in the number of new mortgages in July, the volume of mortgages granted increased by about 7% in August and remains at a high level compared to the average in 2009, the central bank said. About half of the mortgages taken in August were unindexed floating-interest-rate mortgages, and about a third were indexed floating-rate mortgages.
The rate of interest on unindexed floating-rate mortgages increased in August by about 0.3 percentage points following the increase in the Bank of Israel rate for that month, whereas interest rates on CPI-indexed mortgages remained steady and even declined slightly. Households’ outstanding mortgage debt increased by 1.5% in July, and was about 8% higher than at the end of 2009.
“Attention was drawn particularly to the low level of interest on floating-rate unindexed mortgages,” the report stated.
“In light of the developments in the housing market, discussion turned to the possible need for further macroprudential measures in addition to those introduced by the supervisor of banks that went into effect in July.”
According to the forecast by the central bank’s Research Department staff, inflation in the next 12 months is expected to be 2.5%, with the housing component of the CPI the main factor responsible for the fact that the forecast is above the midpoint of the target inflation range of 1% to 3%. Inflation expectations for the next 12 months calculated by sources in the capital market and those of the forecasters are close to the upper limit of the target range of price stability, despite the expectations of an increase in the interest rate in Israel, while interest rates abroad are likely to remain low, which is expected to contribute to shekel appreciation.
The expectations regarding the interest rate – those of forecasters and those based on the capital market – are that the rate is expected to increase by about 1 percentage point in the next 12 months.
In its review on the economy, the Bank of Israel said that most indicators of real activity suggested that economic activity continued to expand rapidly in the third quarter, including initial findings from its companies survey for the quarter, and data on manufacturing production and sales.
“There are also some signs, however, of the possibility of a slowdown in the rate of growth in the third quarter; these include the July foreign trade data and data on government tax revenues,” the central bank said in the report.
Last month, the Bank of Israel updated its macroeconomic forecasts, predicting growth of 4% in 2010 and 3.8% in 2011, with export growth expected to slow from 11.3% in 2010 to 5.8% in 2011.
“This, in light of the expected slowdown in world trade in 2011 compared with 2010 and in US growth, and the real appreciation of the shekel,” stated the report. “Israel’s exports increased rapidly in 2010, following their steep drop in 2009 against the background of the global crisis, so that it is natural to expect their growth to slow to some extent in 2011.”