fischer - Daniel Bar-On - July 12 2011
Stanley Fischer, still worried. Photo by Daniel Bar-On
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Are housing prices heating up or cooling down? It depends who you ask.

The Bank of Israel released minutes from its monetary meeting yesterday suggesting that residential real estate prices are continuing to increase at a fast clip, while the Finance Ministry said Israel's housing market is cooling off.

The central bank's stance comes from the minutes of the July interest rate meeting, which was held towards the end of June. Statistics presented at the meeting showed housing prices continued to rise sharply in May.

The Finance Ministry, for its part, issued a monthly report yesterday contending that housing costs were continuing to cool.

The difference of opinion is nothing new. At the Caesarea Conference last month, Bank of Israel Governor Stanley Fischer noted that the Central Bureau of Statistics and the Finance Ministry had different figures regarding the housing market. He said he was inclined to accept the CBS data.

At the June meeting, Bank of Israel officials received data showing housing prices had risen at a monthly rate of 1.5% in March and April and 15.3% for the 12-month period ending in May.

Fear of overshooting

The Bank of Israel management has not been of one mind regarding how to cool the housing market. The central bank administration ultimately chose not to increase July interest rates or take other action, fearing too many steps could cause prices to drop too rapidly. If this were to happen, it could compromise the stability of the banking system, officials argued.

According to this theory, developers are taking out loans to buy land at high prices, and they would be at risk if housing prices were to drop sharply. In addition, home buyers could find themselves unable to meet their mortgage payments.

Housing prices also featured prominently in the Finance Ministry publication "Orot Adumim" ("Red Lights" ), released yesterday, on the state of the economy as of May. Prices of new dwellings dropped 0.5% between April and May, the ministry states in the report. Preliminary data for June indicates home sales are down sharply, with 8,200 units changing hands that month, which would be the lowest level since 2004 and 14% lower than the figure for June 2010. The ministry says one factor is that fewer foreign investors were buying.

The Finance Ministry also says Bank of Israel moves to rein in mortgage financing has affected mostly young couples, because they generally need to borrow more in order to buy. While Finance Ministry statistics on investment home purchases show a drop in prices in May in the central and Sharon regions, prices rose in Haifa, according to ministry data. The central and Sharon regions also saw a sharp drop in new home sales for the month, according to the statistics.

Bank of Israel officials expressed concern at their June meeting that a global economic slowdown would affect growth in Israel as well.

Some noted, for example, that exports had slowed in April and May compared to the first quarter, increasing the chances that growth would be slower in the second quarter. This would also cut back inflation.

Four members of central bank management recommended keeping the interest rate at 3.25%, which is what Fischer decided to do. One member pressed to have it raised to 3.5%, the minutes show.