Curing real-estate fever

For a long time the thermometer has been pointing to spiking temperatures in Israel’s real estate sector.

By JPOST EDITORIAL
Just like any living organism, an economy – or a given segment of it – can catch fever. For a long time the thermometer has been pointing to spiking temperatures in Israel’s real estate sector, where prices have soared by a dizzying 19% in the past 12 months alone.
This is a radical shift Israel cannot afford to overlook. As in physiology, one ailing organ affects the whole.
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The American experience, which generated the subprime crisis of 2008 and subsequent global recession, is a case in point. Some of the symptoms presented in our mortgage markets of late are similar and, if unchecked, could trigger dire consequences, even if not quite the US disaster.
Our mortgage system is fundamentally different from that of the United States. For a start, it is impossible for someone buying his first home to obtain a loan that covers 100 percent of the property’s value. Buyers have to come up with a substantial down payment, and they may be asked for guarantors.
Still, transactions today are relatively more leveraged than they they used to be, and interest rates over the past two years have been at historic lows. It’s a situation that entices many to take out whopping mortgages by local standards.
The danger is that some borrowers may be getting in way over their heads, and won’t be able to keep up the monthly payments on their floating-rate mortgages in the event of interest rate hikes, which are probably inevitable. This is a risky situation for the borrowers, for the lenders (the banks) and, down the line, for the entire economy.
One of the culprits overheating the housing market is low interest. This week, Bank of Israel Governor Stanley Fischer felt he had to prescribe at least a temporary palliative designed to make large mortgages less attractive, even if only by a minuscule symbolic degree.
He could have achieved this by raising interest rates, but that’s problematic, too. Low as our rates are (2%), they are still higher than the near-zero elsewhere, most notably in the US. That makes the Israeli currency attractive to speculators worldwide. It pays them to buy shekels and derive greater interest here than they would abroad. This boosts the shekel’s value, making Israeli products and services more expensive in the international marketplace and, accordingly, less competitive. Israeli exports are hurt and jobs are lost.
Hence there was no way Fischer was going to raise interest rates just as the shekel is soaring in value against the plummeting dollar. Instead, he jacked up the cost of big mortgages based on variable interest rates.
Fischer’s direct targets are the banks, and the logic is to cool their ardor to lend liberally at rock-bottom rates (for now). He has made the mortgage business marginally less profitable for the banks and more expensive for their clients.
The banks will be obliged to back up with capital 100% of the value of any loan that covers more than 60% of the property price, or is over NIS 800,000, or if 25% or more of the loan is at variable interest. Thus there will be a reduction in the amount of bank funds that will be available for loans.
The aim isn’t to punish home-buyers, least of all first-time home-buyers. The aim is to save them from themselves where necessary; to keep them from making grievous errors.
NOBODY IS under any illusion that this step in itself will suffice to reduce home prices. Israelis are used to exorbitant costs and might not be put off by small increases. Anyone taking out a mortgage for less than 60% of the property value would be unaffected, as would borrowers opting for fixed interest or not exceeding the NIS 800,000 limit. The new measures are mostly meant as disincentives for real-estate investors out to make a bundle via highly leveraged ventures.
The genuine, long-term cure lies in upping supply rather than curtailing demand. That isn’t possible in the already choc-full, ultra-desirable central region. So population dispersion is the call of the hour.
For now, the “periphery” of the country remains relatively uninviting due to its distance from employment opportunities, commercial centers and cultural hubs. Plainly these prohibitive distances need shrinking, via credible infrastructure projects and fast rail lines.
This is eminently doable, though it will take time, and the construction itself will become a growth engine and job-creator.
Such an effort would pay for itself. And the sooner the better.