The Bank of Israel warned Wednesday that the rapid 20 percent increase in property prices is unsustainable and urged policy makers to intervene.“The general picture of Israel’s economy in the third quarter and also assessments regarding the future is positive,” the central bank wrote in its inflation report for the third quarter. “Nevertheless, alongside this positive situation there are some developments that give cause for concern and confront macroeconomic policy with challenges.“First, housing prices and stock prices have been increasing rapidly for more than a year. In the case of housing, recent price increases, at about 20% per year, are not sustainable and demand the attention of policy makers.”The Bank of Israel attributed the surge in property prices to a slower rate of building than the increase in the number of households, while share prices had advanced because of the high economic growth rate, but said both were encouraged by the low interest-rate environment.“Prices of financial assets, and in particular of shares and government and corporate bonds, increased sharply in the third quarter, with a decline in risk indices,” the report said. “The Tel Aviv- 25 Index rose by 16.3%. The rise started concurrently with the temporary easing of concern over the debt crisis in Europe, but it continued even when apprehension about the debt crisis grew again.”Since 2008 to this August, property prices in real terms have risen by 33%, according to the Central Bureau of Statistics.In an effort to stem the surge in property prices and avert the development of a housing bubble, the Bank of Israel at the end of last month issued a directive that will make mortgages over NIS 800,000 more expensive. It requires banking corporations to increase their capital provision for floating-interestrate housing loans granted from October 26, 2010, in which the loan represents more than 60% of the value of the property, and the ratio between the floatingrate part of the loan and the total sum of the loan equals or exceeds 25%.Mortgage conditions will be tightened for buyers of properties of over NIS 1.3 million who take out a floating-rate loan. The new measure will not apply to housing loans received by those entitled to housing benefits in accordance with the criteria determined by the Construction and Housing Ministry.“The steps taken by the Bank of Israel are aimed at moderating the demand in housing,” Analyst Investment House chief economist Yossi Malam said in a report. “However, they can’t solve the problem of the shortage of housing. The answer to the problem of housing supply can only come from the government and local authorities, who need to boost supply to have an impact on property prices.”In light of the inflation environment, the pace of increased economic activity and the persistent rise in house prices, the Bank of Israel raised interest rates for July and October by 25 basis points each, leaving the interest rate in November at 2%.“The challenge facing policy makers is to determine the pace of interest-rate changes and the continued use of additional policy instruments, in particular intervention in the foreign-currency market and supervisory measures, so that the successful economic environment – supportive of price stability, growth and financial stability – is preserved without creating longer-term imbalances,” the report said.The consumer-price index rose 1.2% in seasonally adjusted terms in the third quarter, the report said. The inflation rate was 2.4% in September, within the government’s price target range of 1% to 3%.The central bank expects inflation over the next 12 months to be close to 2.5%, with the rise in housing prices as the main inflationary factor.“One important feature of price developments is the gap that has appeared in the last year between the rise in the housing component of the CPI on the one hand – 6% in the 12 months to September 2010, with an expected increase of up to 8% in the next four quarters – and on the other, the relatively slow increase of about 1% in the other components of the CPI in the last 12 months, with a similar increase forecast in the next 12 months,” the report said.