Mortgage moderation

BoI's latest actions deserve unstinting support.

Radio and TV news broadcasts in the last few days have featured a succession of moving stories about would-be young home-buyers, first-timers hoping to take their first step on the property ladder, deeply distressed by the newly imposed caps on cheap mortgage rates.
The complaints are poignant, and the idea of amending the new caps policy to spare those who are most unfairly affected by it is not without value. But broadly speaking, the change of policy is not really about young couples, and far from being badly damaged by the new move, they are likely to benefit from it in the longer term.
True, lower mortgage rates will from now only apply to loans covering 60 percent of a property’s value instead of 70%. It will still be possible to borrow 70% of the overall purchase price, but at higher interest. This may add to the borrowers’ burden, but when the sometimes sensationalist hype is removed, it becomes obvious that the difference is not huge – and that the benefits of the new loan limitations are far more dramatic.
THERE IS a glaring anomaly in our real estate market. It wasn’t created by young couples and it is not being driven by them. Economists may earnestly debate whether or not a real estate bubble looms in our midst, and how troubling it may be, but the caps imposed by the Bank of Israel speak louder than words. The BoI, which has a pretty good record through the ongoing global economic crisis, is plainly worried.
The background is straightforward. Interest rates are nearly at rock-bottom. They have to stay low because of the economic downturn worldwide. Low interest rates mean a low return on investments, particularly of the relatively risk-free conservative variety. Investors therefore need to look for reasonably safe alternatives. Because low mortgage rates are a corollary of low interest rates, real estate stands out as an alluring investment opportunity.
Indeed, investors have been buying up property like hotcakes, and statistics show that a whopping 20% of them have been reselling the newly bought properties within six months of purchase, raking in massive profits despite high taxes. Because of the tempting mortgage offers, these operators don’t need to put much of their own capital down.
We don’t begrudge anyone’s money-making success, but such wheeling and dealing inevitably pushes real estate prices sky high. Call it what you will, that makes for a bubble.
The BoI had to limit the danger because eventually such a bubble could quite adversely impact on the stability of our banks, which need to amass the capital to secure the mortgages they offer. Since interest rates are at present untouchable, the BoI’s only option was to reduce mortgage attractiveness. This is perhaps as much a symbolic gesture as one that will fundamentally overhaul our scene. But it will make mortgages marginally less enticing for speculators, thereby helping to restrain the price-hiking demand.
If and when that happens, the first to benefit would be young couples. It’s preferable for them to purchase homes for less without super-generous mortgages, than to borrow excessively for over-priced apartments.
NOT TOO many years back, young couples took comparatively small mortgages and gravitated away from trendy hubs. Today, they hanker after city-centers and take out gargantuan mortgages. Once, a mortgage whose value reached 30% of the cost of a home seemed excessive. Today, two-thirds seems minimal. A 15-year mortgage was long by yesteryear’s criteria. Today, 25 years of repayments aren’t unusual.
Israelis might not have been overextending quite as untenably as ourAmerican counterparts, but we have been heading in that generaldirection. Ours, after all, used to be a country in whichmortgage-lenders were traditionally tightfisted and ultra-regulated. Itwas never simple to obtain a mortgage, especially a hyper-sized one. Oflate, everything got appreciably easier, dangerously easier.
The looming danger locally cannot be compared to the repercussions ofthe profligate practices of America’s Freddie Mac and Fannie Mae, butthere has been a worrying departure from the more prudent frameworksthat used to apply. And the bursting of the real estate bubble maytrigger undesirable chain-reactions along the US pattern – even if notas severe.
This isn’t the exclusive concern of eager banks and impulsive clients.The country’s economic well-being hangs in the balance. The BoIconsequently deserves unstinting support for moving to impose greatermortgage moderation – for at least trying to break the vicious cycle ofrising real estate prices and low interest rates. In combination, theseare the classic ingredients for a crisis.