Warning against the consequences of a real estate bubble in Israel, Bank of Israel Governor Stanley Fischer defended his new rules on mortgage lending.
Most of the financial crises around the world started in property, he said. Israel must not let a real estate bubble develop and burst.
"If this happens, we will have a problem we managed to avoid over the past three years," Fischer told the Knesset Finance Committee yesterday at a special holiday recess session devoted to the new central bank guidelines.
The new rules limit the proportion of mortgage loans based on prime interest to 33% of the loan.
Make no mistake: "The new steps do not impair the ability of households to take out a mortgage, the central bank governor reassured. "We are trying to lower the level risk borrowers have to take upon themselves." The fear is that if people take a large loan with floating interest, they may not realize that as interest rates rise, so will their monthly repayments.
"We are protecting them through the changes we are currently making. This approach also protects the financial system," Fischer said, asserting: "What is good for the customers is good for the financial system and the economy."
The central bank said yesterday that its calculations ishow fixed-rate mortgages linked to the cost of living index, not only reduce the risk to which the borrowers are exposed but also slightly reduce monthly mortgage payments in the short term compared to variable mortgages linked to the prime rate.
The payments on fixed rate mortgages would rise in later years when presumably the homeowner's ability to pay would also increase.
Fischer told the committee 80% of mortgage debt is either linked to the prime rate or other variable rates, and interest rates are likely to rise.
"We are seeing that 80% of the population currently getting mortgages are exposed to an increase in interest rates. Contrary to the arguments being made, we are protecting young [borrowers] by not allowing them to take out risky mortgages," Fischer told the committee.
Committee chairman Moshe Gafni (United Torah Judaism ) asked Fischer to enable the Bank of Israel to exempt young couples from the new limitations on variable rate financing, saying they would make mortgage financing more expensive. He acknowledged that the new policy aimed to address the potential of a housing price bubble, but said a way must be found to make mortgage financing available.
Despite recent steps by the central bank, Fischer acknowledged that the Bank of Israel's policies can only affect demand and that it is essential that the housing problem be addressed by increasing supply.
Housing starts are mounting. In 2008, there were 30,000 housing starts, Fischer noted, and that was up to 40,000 last year. More land needs to be available for sale and planning approval procedures must be expedited. "I don't see housing prices coming down in the near future," he added.
"From 2008 onward housing prices rose fast. Compared to 2000, we are at a higher level than Ireland and close to what happened in the United States," he said, a reference to the real estate bubble in the U.S., which burst with serious financial implications.
He also said most mortgage borrowers are paying less than prime due to banking competition, which puts the banks in a problematic situation because they earn very little on such mortgage loans. If homeowners start defaulting on their mortgages, Fischer said, "the banks will start to lose money and the situation will be very tenuous."
Banking Supervisor David Zaken called variable rate mortgages a "honey trap." He said homeowners operate on the assumption that if interest rates go up, they will be able to switch to a fixed rate. Such a rate, however, would be expected to be higher, he warned.
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