Analysis of the Israel mortgage market shows an increase both in the number of transactions, and the loan-to-value ratio. 42.3% of mortgages taken in February 2021 were at a loan-to-value ratio of sixty percent, as opposed to 32% percent of mortgages just two years ago. Further, the Bank of Israel is disappointed that the steps it took to reduce the cost of mortgages have not been passed to the buyer and blames the mortgage banks.
Data recently published by the Bank of Israel reveals that the mortgage market in Israel continues to hit record highs. According to the data, during February 2021 the public took out new bank mortgages totaling 7.3 billion NIS, which is 19% higher than February 2020 and around 46% higher than February 2019. The average amount of a mortgage loan in February 2021 was around 800,000 NIS.
There are two main reasons for the increased level of mortgages. The first is the increase in the number of Israel real estate deals due to the growth in demand for apartments, starting in the second half of 2020. A second reason is an increase in leveraging by property buyers. This is reflected in the fact that 42.3% of mortgages taken in February 2021 were at a loan-to-value ratio of 60% or higher. This is as opposed to 39.8% of mortgages characterized as highly leveraged in 2020; and 32% in 2019.
The increased activity in the mortgage market in Israel is closely tied to the state of the Israeli real estate market, where prices continued to rise by 4% during the course of 2020. Due to the rising prices, property purchasers prefer not to wait and are anxious to close deals. Similarly, low interest rates, which are not likely to rise in the near future, provide a fertile environment for mortgage borrowing.
In addition, there has been increased interest by investors in the residential market, following the government’s decision in July 2020 to significantly reduce the rate of purchase tax, from a minimum rate of 8% to 5%. The financial press in Israel has presented data reported by the mortgage banks, showing that in 2020 investors comprised on average approximately 11% of the mortgage market, whereas in January-February 2021 this rate increased to approximately 12%-13%.
This data was published three months after the Bank of Israel‘s decision to take a step intended to significantly reduce the cost of mortgages – lifting the restriction on the prime interest component in a mortgage. Until January 2021, the prime interest-linked component – which is considered the cheapest rate – could not exceed one-third of the total mortgage. From mid-January, the limit was raised to two-thirds of the mortgage, thus enabling mortgages to be taken at a more attractive interest rate.
However, both the Bank of Israel and the public were disappointed. In reaction to the decision, the Israeli banks raised mortgage rates on prime interest tracks offered to borrowers. As a result, the banks increased their own profits, while apartment buyers barely felt any reduction in costs. The public was highly critical of both the mortgage banks and the Bank of Israel, which was felt to have implemented a “half-baked” measure. Consequently, the Bank of Israel admonished the banks and threatened to impose sanctions if they did not lower their rates.
This issue was at the center of a recent debate in the Knesset finance committee. During the session, Michal Halperin, the Director-General of the Israel Competition Authority, exclaimed that the mortgage market is not sufficiently competitive: “The perception is that the mortgage market is one where there is competition between the banks. In practice, it is a concentrated market where three players centralize 75% of the activity, and any option for consumers to compare offers from different banks is limited, difficult, and unrealistic.”
Ricky Elias, the Deputy Supervisor of Banks at the Bank of Israel, attacked the mortgage banks’ behavior in the wake of the Bank of Israel decision to lower mortgage costs: “Our position is that the benefit should be passed to the consumer. We have reviewed data on all mortgage approvals granted by the banks since the reform came into force, and found that interest rates did go down, but only moderately, and not enough. We are determined to reach a situation where the interest rate is more significantly reduced, and we have the tools to do this.”
In any event, due to the increased demand for purchasing a home in Israel and the trend of rising prices, it seems that apartment buyers will have no choice but to continue to accept the mortgage banks’ terms until the Bank of Israel finds a way to force the banks to pass on the reduced mortgage costs to their customers.