Mortgages jumped 56%, apartment prices rose 30% since 2008. What will be the effects of rising interest rates in Israel?
Posted on 25. Mar, 2010 by Buy-It In Israel Staff in Israel Real Estate, Mortgages
©iStockphoto.com/Stacey Newman
The low interest rate environment in Israel at the beginning of 2009 amid the global economic crisis and the belief that it would continue to decline lured many buyers of real estate in Israel to take out unindexed floating-interest mortgages (prime-rate loans), the interest on which is the most affected by changes in the Bank of Israel interest rate. However on the back of encouraging signs of a recovery in the growth of the economy, Israel became the first central bank to raise interest rates at the end of last year, which means that monthly mortgage payments are set to rise.
The share of low-interest mortgages in Israel out of total new mortgages has been rising steadily from the middle of 2008, and peaked in February 2009 at 77 percent, but it declined thereafter to reach 51 percent in December 2009. Outstanding unindexed floating-interest mortgages totaled NIS 43 billion in September 2009, and borrowers have benefited from relatively low repayments during the last two years, due to the low interest rate. Average annual interest on new unindexed floating-interest mortgages taken in 2009 was 1.7 percent, compared with 5.5 percent on unindexed fixed-interest loans and 3.1 percent on the indexed fixed-interest loans.
The Bank of Israel said this week that the increase in the burden of mortgage interest payments following expected increases in the interest rate in 2010 will not have a serious impact on private consumption or on the stability of the banks. Interest repayments in 2010 are expected be about NIS 1 billion higher than their level in 2009, and the ratio of repayments to disposable income is expected to increase by 0.2 percent.
With regard to the risk to the banking system in Israel, the rates of financing in the mortgage market are far lower in Israel than the norm in other countries, which reduces the risk to a bank should a customer become insolvent. Furthermore, in Israel there is hardly any market for mortgage securitization, and the bank bears the mortgage risk throughout the duration of the debt. For that reason, banks in Israel, when considering granting a mortgage, examine the customer’s repayment ability also at higher rates of interest. Thus, a rise in interest in the mortgage market is not expected to affect banks’ stability, although it is certainly expected to boost arrears in the mortgage market, which at the end of 2009 stood at 1.08 percent of outstanding housing credit.
The boom in the Israel real estate market over the past two years has hardly been affected by the global financial crisis, while in other developed countries property markets slowed down or experienced a crisis. Average apartment prices in Israel rose more than 30 percent since 2008, following several years when they hardly changed. At the same time, the total sum of Israel mortgages jumped by 56 percent over the past two years to NIS 65 billion, compared with NIS 41 billion in the years 2006 and 2007.
The rapid increase in the extent of new mortgages is the result of the drop in interest rates, which was reflected in the mortgage market too, leading to an increase in demand for apartments, also as investment assets. This was part of the trend evident in 2009 of investors searching for a better return in light of the low rates of interest obtainable from other investment channels, such as bank deposits and government bonds.
Mortgages are a major component of households’ debt burden in Israel, and at the end of 2009 they constituted about 50 percent of households’ total outstanding debt. Despite the rapid growth in new mortgages in the last two years, households’ debt burden did not change to any significant degree; this can be seen from the ratio of their debt to GDP, or the ratio of their debt to disposable income, which is markedly lower in Israel than in the US, the UK, and countries in the eurozone. Thus, the debt/disposable income ratio in Israel was below 60 percent at the end of 2008, compared with 110 percent in the US and the UK. In addition, house prices increased in Israel since the beginning of the decade more slowly than they did in those economies.
Looking ahead to 2010, Bank Hapoalim, the country’s largest bank, said that the continued rise in home prices in the first two months of the year combined with higher interest rates increase the monthly mortgage payments burdening buyers of homes in Israel. Financial conditions of home buyers of real estate in Israel deteriorated in February once again according to Bank Hapoalim’s monthly Mishkan home buyers index. The Mishkan home buyers index, which monitors the financial conditions affecting home buyers in Israel, fell by 2.1 points to 135.7 points in February, representing a decline of 1.6 percent. The Mishkan home buyers index is a monthly measure, which tracks the financial conditions affecting home buyers in Israel. It is composed of four variables published by the Bank of Israel and the Central Bureau of Statistics: the mortgage interest rate, apartment prices, the average salary, and the unemployment rate. A rise in the Mishkan Index reflects improved conditions for home buyers and a fall a deterioration in conditions making it harder for home buyers to purchase an apartment.
According to the Israeli Central Bureau of Statistics, home prices rose last month by 1.6%. In the last 12 months, home prices in Israel rose sharply by 21% in nominal terms and 16.6% in real terms. Since mid-year 2007, home prices rose by 39% in nominal terms and 24% in real terms. The Mishkan Index reached a peak of 171 points in July 2008 and has since declined by 19 percent reflecting a sharp deterioration in home buyers financial conditions. On the other hand though, the average interest on 17-20 year mortgage loans (fixed rate, CPI linked), as published by the Bank of Israel, fell by 0.05 percentage points in February from 3.68 percent a month earlier to 3.63 percent.
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