An industry out of control

Will the Central Bank’s new regulations on mortgages cool the real-estate market?

By JOHN BENZAQUEN
Tel Aviv skyline 521 (photo credit: Marc Israel Sellem)
Tel Aviv skyline 521
(photo credit: Marc Israel Sellem)
Last Wednesday, the Bank of Israel, via Supervisor of Banks David Zaken, published a draft directive regarding mortgages bearing floating interest rates. From May 5 on, banks are not allowed to grant mortgages in which the portion bearing such interest rates is limited to a third of the total mortgage. This includes mortgages bearing prime interest rates, and foreign currency-denominated mortgages.
Floating-rate mortgages are those for which the interest rates vary during periods of less than five years, and are linked to the Consumer Price Index. This new directive is the last in a series of measures via which the Bank of Israel is endeavoring to cool the boiling real-estate market. This new directive is a continuation of previous steps taken by the Bank of Israel in an effort to rein in both real estate demand and spiraling real-estate prices.
The past measures had very little effect. Will this one affect the real-estate industry as intended?
But first some figures that will explain why the governor of the Bank of Israel is so worried by the state of the real-estate industry, which is, in some ways, getting out of control.
Since July 2007 and until the end of March this year, real-estate prices have risen by 60 percent. In the 12 months leading up to March, prices shot up by 16.1%. Price rises have continued during 2011. In the first quarter of the year, prices rose by approximately 3.5%, and the trend is set to continue.
The rise in real-estate prices has been fueled by investor demand, which, in turn, has made extensive use of credit. Consequently, the demand for mortgages has soared.
Just look at the figures: During 2010, mortgages amounted to NIS 48 billion – a rise of 35% compared to the NIS 36b. in 2009, and a rise of 80% compared to the NIS 27b. in 2007.
And mortgages are still rising. In March, they amounted to NIS 4.7b. – a rise of 23% in relation to March of 2010, and a staggering 17% rise compared to the preceding month.
The Bank of Israel is worried, and with reason. The rise in real-estate prices is fueling inflation; but, worse, there are fears that many of those taking out a mortgage in these times of relatively low interest rates will not be able to meet monthly payments when interest rates rise, as they are bound to do in the future because the Bank of Israel is raising interest rates, and there are those who believe that they may rise to 5.5% by 2012.
A rise in interest rates will affect those who have taken out mortgages bearing floating interest rates of the kind that will react immediately to any rise in interest rates imposed by the Bank of Israel.
The level of anxiety of the bank has been rising constantly because everything it has done to date has been to no avail. In February last year, the cost of mortgages to “purchasing groups” (kvutzot rechisha) rose by approximately one percent; in July, the cost of large mortgages of over 60% of the value of the property was raised; and in October, the cost of mortgages of which over 60% was made up of funds bearing fixed interest rates was raised once again.
But what does the Bank of Israel want to achieve with the latest set of directives? In a special press release, the bank explained the reasons for the new regulations as the “need to increase public awareness of the dangers of floating-rate mortgages.” It further added that “most financial crises, including the last one, were caused by rapid real-estate price rises.”
It appears clear from the bank’s press release that “shock-stopping” the continued rise in real-estate prices by damping down demand is the main aim of the new regulations.
Bernard Ruskin, general manager of Re/Max Israel, said: “The new regulations are not meant to damp down demand or reduce prices, merely to stabilize the market. During 2010, the number of floating-rate mortgages rose sharply.
“A floating-rate mortgage in these times of rising interest rates is something of a gamble. Let us not forget that the subprime crisis – the forerunner of what could have been potentially one of the world’s greatest economic crises ever – was triggered by rising interest rates that made it impossible for many borrowers to meet their monthly payments. “The new regulations minimize the element of risk, and so I am all for them.”
Ruskin, who like Prof. Stanley Fisher is a native of Rhodesia (now Zambia and Zimbabwe), was one of the only real-estate operators with nice things to say about the new regulations.
The others were derisively critical.
Motti Kidor, director-general of the Association of Contractors and Builders, claimed: “The new regulations will make it more difficult for newlyweds to afford a home. Those who need a roof over their heads will carry on buying. But the new regulations will make it more difficult.”
Chaim Feiglin, general manger of the Zemach Hamerman real-estate construction and development company, believes that the new regulations will further reduce the number of those able to buy housing.
Moreover, it was not only real-estate operators who were critical; leading lights of the financial community were too.
Prof. Dan Glai, chairman of the Sigma Financial group, was not very supportive of the new regulations. “So what if the Bank of Israel has limited the floating-rate portion in overall mortgages? This will not curb demand and halt the rise in prices,” he said.
Rafi Gozlan, chief economist of Leader Capital Markets, said: “The demand for real estate and the consequent rise in prices is caused by the very low level of interest rates. Unless the Bank of Israel is willing to substantially increase interest rates, any steps taken by the Central Bank to cool the real-estate market will have only a slight, temporary effect, if anything.”
Amit Kaminsky, CEO of AMG, a mortgage consultancy company, said: “The new regulations will neither decrease demand for real estate, nor demand for mortgages,” while Rami Lugasi, CEO of Balance, a company specializing in financial consultancy, was less hard on the Bank of Israel.
“Its new regulations may perhaps dampen investment demand for real estate, but nothing more,” he opined.
It is still too early to determine whether the new regulations will succeed in cooling the real-estate industry. Nevertheless, most experts believe these regulations will produce only meager results.
Should this happen, the Central Bank will take further, more stringent steps to try to cool the real-estate market.