It is reassuring to have a world-class economist at the helm of the Bank of Israel. Just knowing that Stanley Fischer – a former chief economist of the World Bank and former professor at MIT whose students included the current chairman of the US Federal Reserve, Ben Bernanke – is responsible for our monetary policy can have a calming effect on the economy as we approach turbulent times.When Fischer expresses concern about a particular aspect of our economy, political leaders should sit up and pay attention. The Bank of Israel governor is, apparently, unhappy with our overheated housing market.In a move billed as nothing short of “dramatic,” Fischer ordered the banks to lower the loan-tovalue (LTV) ratio to 50 percent for mortgages provided to house purchasers who intend their purchase to be an investment – including foreign investors. Mortgages for a first house will be limited to a LTV ratio of 75%.The move is designed to counter the effect of yet another prime interest rate cut from 2.25% to 2%.Fischer lowered the interest rate in order help rejuvenate the slowing economy.However, lower interest rates also tend to push investors out of solid investments such as government bonds or savings plans offered by banks and to encourage them to look for alternative “solid” investments such as the housing market.Rent yields pay off the low interest; capital gains from rising real estate prices (housing prices are up 2.9% in the past six months) provide the investor with easy profits.Of the 20% of Israelis who hold mortgages, it is estimated that 9% are investors while only 3% are those who own only one home. About a quarter of all house purchases are made by investors.Fischer is concerned that banks are overly exposed to the housing market. Some 40% of banks’ credit is extended to building contractors and home owners. A sudden decrease in housing prices could result in an economic crisis similar to the US subprime mortgage crisis of the late 2000s.By restricting the LTV ration to just 50%, Fischer hopes to reduce banks’ exposure and slow the sharp rise in housing prices by lowering demand for houses.Still, Fischer’s ability to fight rising housing prices is limited. Restricting the LTV ratio might make it more difficult for investors to buy houses.But as long as investors recognize that there is a severe shortage of housing in Israel they will have an incentive to invest in the housing market.Fertility rates are higher in Israel than anywhere in the Western world and they have been for decades. Every year tens of thousands of young families add to the demand for housing. In parallel, the Israel Lands Authority, which controls the supply of land for housing, is notoriously inefficient and burdened by red tape. As a result, the construction process is dragged out and land prices remain high.The only way to truly fight housing prices is by focusing not on demand, but on supply. Currently, the number of houses constructed every year cannot keep up with demand. More new housing – for sale and for rent – needs to be provided. In parallel, the zoning process for housing needs to be made more efficient, while at the same time not compromising the necessary oversight that prevents damage to the environment or to historical sites. Replacing old, low-story buildings in city centers with high-rises should be encouraged as a way of limiting to a minimum building in open green areas.Only the government, which is currently focused on elections, can direct all these changes. Voters must demand that a solution to the housing shortage be a central issue in the election campaigns of all the major political parties.The next government must commit itself to grappling with the housing shortage. We are lucky to have a man as talented as Fischer heading the Bank of Israel. But there is only so much one man can do.