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At the end of the course, exiting the class after the last lesson, Prof. Robert ("Bob" ) Kaplan asked: "Who will be the Israeli Enron? The Israeli Worldcom?"

That was in late 2003, after a number of intensive lessons in which Kaplan, a lecturer on business administration, was analyzing the great frauds in accounting and finance on Wall Street in the late 1990s and early part of this millennium.

Hmm. Tricky one. On the one hand, the probability that fraud of Enron's epic scope would happen in Israel is practically zero. But to answer that everything in Israel's business sector is squeaky clean would be stupid.

After hemming and hawing, a compromise was born that perhaps Kaplan would buy: The Israeli capital market wasn't advanced and complicated like the American one. Methods of stealing, pumping up results, or cheating would be done by far simpler methods in Israel. It isn't that the Jews in Zion are any better than their colleagues on the Street: It's just that the system is different.

In recent months a similar issue has arisen. After a bubble in property prices all but destroyed the mighty American economy, brought its financial system to its knees and left millions of Americans with giant debt and homes worth half their purchase price - could that happen in Israel, where property prices have been rising at warp speed for three years now?

Again, one needs to choose one's words carefully. One should avoid forecasts. Nobody foresaw that property prices would double in the last couple of years, in some places. Nobody thought that the pace at which housing prices were rising would accelerate in the aftermath of the great global economic crisis.

Maybe the answer should go along similar lines: Israel isn't America, and the chances of a real estate meltdown à-la U.S. is not high.

Walking on eggshells

Then is the Bank of Israel being too cautious? Too conservative? No. Governor Stanley Fischer is doing what a central banker should do: He is protecting the stability of the banking system.

It's no coincidence that Israel's bankers don't scream against Fischer's constraints on mortgages - limits on type and scope. There are many reasons. First of all, Fischer's status is second to none. The idea of going up against him is pretty daunting. When Fischer delivered his famous "dirty tactics" speech (attacking the gas tycoons for their tactics in fighting against paying higher royalties ), that ended the story: It was clear the gas tycoons would have to beat a retreat.

Secondly, mortgage banking is the most competitive arena in Israeli banking. It isn't a pork barrel over which they might fight the regulator. It's the other segments of the banking business that are uncompetitive and boast fat profits.

Thirdly, like most managers, bankers are busy mainly at comparisons with their rivals. As long as Fischer is imposing the same restrictions on all, they don't feel personally threatened. Some are actually relieved that the regulator is reining them all in.

Superficially, signs of froth reminiscent of the U.S. bubble have been discernible here. Real estate prices have been rising extremely fast, driven not by Israel's brisk economic growth but by the low rate of interest - and a dramatic increase in mortgage borrowing. In the last three years, Israelis have taken out NIS 60 billion in mortgages, more than double the amount borrowed to buy homes in the three preceding years.

The outstanding debt of Israelis, secured by the homes and land they bought, increased by 50% in the last three years, almost five times the increase in Israeli GDP. In financial terms, that's called increasing leverage: The private real estate market in Israel has become leveraged like never before.

Disposable income did not significantly increase in the last three years. The ability to repay and service debt has not improved much: Salaries did not rise much, productivity did not increase, and neither did GDP to any significant degree. All that happened is that interest rates dropped, creating a momentum of rising prices. The upshot is that Israelis, fearful that prices will rise even more, are buying property.

But that is where the similarity between Israeli and U.S. property markets ends. In America, risks in property purchases were rolled over from homebuyers to banks and from banks to the market, through clever financial assets. Here the risk of that heightened leverage has stayed with the homebuyers.

When pain will be shared

In English: If property prices plunge, the burden and pain will be that of the homebuyers. In an extreme scenario (which is what Fischer is worried about ), the banks will share the pain but that's where it will end. Since most of the pain will stay with the homebuyers, the chance of a U.S.-type snowball developing is remote.

Actually we don't need to wait for home prices to fall: The pain is happening. Tens of thousands of Israelis who bought property in the last few years feel it. (So do people who couldn't afford to buy ). The ratio between Israeli disposable income and home values has dropped dramatically in the last three years. It's never been this hard and frustrating for young couples, or anyone in fact, to buy a home in Israel.

Fischer's steps won't help people who bought property in a rising market during the last three years. His steps won't help anybody buy in the next year either. Home prices remain high relative to disposable income and as interest rises, so will the pain. But if Fischer hadn't taken these steps and the leverage in the housing market had grown and grown, then the risk of crisis would have been great. The higher the leverage, the greater the probability of people defaulting. We're not there. But Fischer had to do something to prevent that scenario.

There are other questions that Fischer, and we all, need to ask ourselves in view of that NIS 60 billion borrowed in new mortgages (in net terms ). How will that enormous sum affect the rest of the economy? How much economic growth, and how much of the public's feeling of wealth is based on that NIS 60 billion? How much of the Israeli "economic wonder" of the last couple of years is based on inflated property prices? And what will the Israeli economy look like the day the real-estate leverage madness finally ends?