Legal Ground: The end of easy mortgages?

So, will residential prices go down?

By HAIM V. KATZ, SAM KATZ
It wasn’t exactly an unexpected “bombshell,” as the newspaper headline breathlessly described it. It was an inevitability.
It was predictable that the Bank of Israel would move to cool the residential mortgage market. We have seen what anarchy of easy mortgages could do to a massive established economy like that of the US. Even more so, the collapse of a bank in a small economy such as Israel could be a disaster.
You don’t have to be an Einstein to do the math: If four or five years ago your bank would lend you NIS 700,000 for an apartment that cost NIS 1 million, today – to keep up with spiraling prices – the bank would have to lend you NIS 2.1m. for the same apartment that now costs NIS 3m. That is a huge increase in the bank’s risk.
Despite those risks, the banks are keen to sell you mortgages. Mizrahi-Tefahot, the biggest player in the mortgage market, with a third of the mortgages, registered an increase of 17 percent in its mortgage activity in the first quarter of 2010. Out of the NIS 35 billion  in the mortgage market, 50% financed purchases of homes higher than 60% of loan to value (the level of the borrowing in relation to the actual cost of the property).
Many people borrow 80%-85% of the value of properties. One of the reasons they do so is that mortgages have never been so cheap – the most affordable since the establishment of the Bank of Israel.
Billions of shekels have been rechanneled from low-interest-bearing bank accounts and other financial products to investments in residential property, with their potential for high returns.
So the real-estate market is buoyed by all kind of factors, and Bank of Israel Governor Stanley Fischer is a worried man. He is also a determined man whose aim is clear: to lower the prices of residential properties.
How is he attempting to do this?
It’s impossible for the Bank of Israel to raise the cost of money; the crisis in Europe sends a clear message that low interest rates are needed to bolster the economy. Therefore, the central bank has devised a way to drive up the cost of your mortgage without raising interest rates.
This is done by differentiating between two types of mortgages. The first, a mortgage of up to the value of 60% of the purchased property, remains untouched. But if you want to borrow more than 60%, as many people do, the Bank of Israel will now require the bank to set aside 0.75% of the total mortgage to be placed in a separate fund.
But have no fear – the bank will pass on these costs to you, the borrower. As a result, you might be deterred from borrowing the extra funds, and you will consider renting rather than purchasing. This is even truer for the segment of the market the central bank wants to dampen down: apartments bought by investors, not for their personal use but to rent out.
Investors tend to make cooler financial calculations with regard to their borrowing; after all, they are in it for the profit. The new bank regulations may give them an incentive to reconsider their investments.
The collateral damage is obvious: Young couples, olim and othereconomically weak groups will find it more difficult to buy a home oftheir own. Whereas before, these groups had to find 25% to 30% of theirown capital, now they will have to find 40% to keep bellow the newlyset standard.
Suggestions have already been made in government circles that mortgagesfor young couples be subsidized by the state up to 20%. Other ideashave been presented to allow a different level of mortgage pricing forfirst-time buyers. But these are, at this stage, just ideas and willrequire the usual lengthy legislative process. In comparison, the Bankof Israel’s regulations are already facts on the ground that areimpacting borrowers.
So, will residential prices go down? The famous adage in Gemaratractate Baba Batra is that prophecy these days is given to fools andchildren, which usually deters lawyers from making prophesies.Nevertheless, Fischer is determined to pursue the goal of bringing downresidential house prices. If he is consistent in this, he has the toolsto do so and he will be successful.
israelaw@netvision.net.il
Dr. Haim V. Katz is a senior partner in a law firm withoffices in Jerusalem and Tel Aviv specializing in real-estate,commercial, family and probate law. Sam Katz is a Jerusalem jurist.They have collaborated on several legal works on probate and land law,including the e-book Buying Your Home in Israel.