The Bank of Israel has taken another step to cool down the housing market, in yet another attempt to head off a bubble: Yesterday, Banks Supervisor David Zaken published a draft directive limiting variable rate loans to only a third of the total mortgage. This applies to all variable rate mortgages, whether interest rates are linked to the prime rate, the consumer price index or a foreign currency.
The Bank of Israel does not believe the housing market is currently in a bubble, but that this could change, which is why he is acting now, the banks supervisor said.
Zaken said the changes would make mortgages more expensive for homebuyers, and predicted rates would increase by about 1%. "But if we see housing prices and the debt load increasing, we will have to think about further steps," said the supervisor. "We do not feel low prime interest rates can be enjoyed forever," he added.
The Bank of Israel wrote: "Many financial crises in other countries began with housing credit granted under terms that did not reflect the sector's risks, and that were inappropriate in light of rapidly rising housing prices. The new directive is intended to prevent such developments for the sake of the public and the whole financial system."
The new directive will apply to loans approved in principle from May 5, 2011, for new variable-rate housing loans whose interest rate will change within five years.
The draft will be discussed soon by the central bank's Advisory Committee for Banking Issues, after which Zaken will draw up a final directive.
The change will raise mortgage costs for those who need loans to cover more than a third of the home's value, and mortgage banks are expected to raise their interest rates once the directive takes effect.
In its press release, the Bank of Israel said: "The draft directive was published in light of ongoing trends in the housing market, primarily the significant volume of home loans granted at variable interest rates, which bear inherent risk for borrowers, and therefore for the banking system as a whole. The risk is that the interest rate will rise, markedly increasing borrowers' monthly mortgage payments to an extent that impacts repayment ability. This scenario has become more realistic in light of the current trend of rising interest rates."
The directive also contains a disclosure requirement, obliging banks to advise customers with mortgages where more than one-third of the loan is linked to the prime interest rate. The disclosure requirement is meant to increase those borrowers' awareness of what could happen should interest rates increase, and to help them assess this risk and how to reduce it.
Fischer calls urgent meeting with bankers
In a surprise move yesterday, Bank of Israel Governor Stanley Fischer invited the chairmen and CEOs of Israeli banks to an urgent meeting at the central bank's offices in Tel Aviv this morning. Fischer plans to warn them of the dangers of a real estate bubble, and what would happen when it deflates.
The last time Fischer called such an emergency meeting was in 2008 at the height of the global financial crisis, when he asked to hear how the banks were dealing with the crisis and proposed a number of steps.
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