Israelis took out a record high NIS 4.9 billion in mortgages in July. The value of mortgages granted by local banks rose about NIS 1 billion compared to June, and was up 20% from July 2011, reported the Bank of Israel yesterday.
The proximate cause is the lower interest rates after the Bank of Israel cut the prime rate by 0.25% in July to 2.25%. This reduction - and expectations for further rate cuts this year - have led commercial banks to significantly lower the rates they offer home buyers.
Interest rates for mortgages not linked to inflation fell to a low of 3.67% on average in July, down from 3.83% in June. Inflation-linked mortgages dropped to an average interest rate of 2.46% last month, down from 2.52% in June.
In addition, demand to buy new homes rose strongly on reports that housing prices were once again set to rise, and the number of real estate deals was picking up. Many buyers who were sitting on the fence and waiting seemed to have decided that July was the time to enter the market and buy. Many new buyers seem to have memories of the big housing price jumps of 2009 and 2010, which lasted through the beginning of 2011.
Investors return to real estate
People have received more and more indications that prices are not going to fall, said a senior banker yesterday. "As interest rates fall, it reminds [us] of what happened the last time interest [rates] fell: More people are buying apartments for investment - not out of the intention to make millions, but out of despair from the interest rate they can receive from bank deposits," he added.
The government or the Bank of Israel may have to intervene to slow down rising housing prices. So far, the government's attempts to increase the housing supply have not borne fruit. There has even been a drop in the number of building starts recently - as prices have once again risen. Finance Minister Yuval Steinitz's plan to reduce prices from last year has been abandoned. This has led many investors to return to the housing sector, which is driving prices up even more.
In 2010, the central bank placed restrictions on mortgage financing for over 60% of the value of the home, and last year restricted the number of variable rate mortgages to only a third of all loans. But this was not enough.
The Bank of Israel is expected to take its next step, further restricting the level of financing the banks can provide. No decision has yet been made, but it is clear any new restrictions will make it more difficult for young families to buy their first homes.
BOI to take more steps?
Most of the increase in mortgages has been in variable-rate loans. The value of prime-rate loans, which are not linked to inflation, climbed 33.4% in July to NIS 1.45 billion, and they account for almost 30% of mortgage loans. Variable-rate mortgages rose by 19.7% in July compared to June, reaching a total of NIS 2.06 billion. This came despite the limitations placed by the Bank of Israel on variable-rate loans.
The explanation is that homebuyers are taking out variable-rate mortgages whose interest rates are adjusted every five years - and for technical reasons are not considered by the Bank of Israel to be true variable-rate mortgages, so the restrictions do not apply.
Another possible explanation is that many of these loans were actually arranged and even signed before the new restrictions took effect, but the money was not actually paid out until last month. For example, many mortgage loans are approved well in advance, but a sizable chunk of the money is not paid to the contractor until the home is actually finished and handed over, and there can often be a period of years between the mortgage approval and the final payment. Also, many Israelis take possession of their new homes in the summer, in advance of the new school year.