Frustrated by the Bank of Israel's rejection of his plea to relieve banks of lending limits to contractors in order to expedite housing development, Housing Minister Ariel Atias is trying another tack - to get the Finance Ministry to provide guarantees for builders. Treasury officials are reportedly smiling on the concept.

Stanley Fischer, the governor of the Bank of Israel, is apparently horrified by Atias' vision of flooding Israel with "unprecedented" amounts of land for housing development, on the grounds that a glut of new dwellings could depress home prices too violently, causing ripples of economic damage.

The underlying problem is that over time, the scope of housing development has fallen short of the scope of population growth. In other words, supply is growing more slowly than demand, which is one reason housing prices in Israel have risen ferociously in recent years. The summer protests in Israel began with young people protesting that they could have respectable full-time jobs but still not be able to afford to buy a home.

Atias' idea that the Bank of Israel rejected two weeks ago is that it waive its rule that a bank may not lend more than 20% of its loans portfolio for housing construction. The central bank's main mission is to safeguard the stability of Israel's banks: allowing them to increase their exposure to the housing market would not further that aim.

Nor does the Bank of Israel smile upon Atias' latest idea, which the minister presented to the budgets department at the Finance Ministry, seeking that the state guarantee loans contractors take from banks, so they would lend more for housing development. The ministry is still studying the concept.

The treasury commented yesterday that among its efforts to stimulate the housing development sector, it agreed to give developers more time to pay for land.

Atias had met with Fischer two weeks ago, at the minister's initiative. There were two items on the agenda. One was bank support for housing development and the other was the scope of housing construction in 2012. Atias complained to Fischer that the central bank won't let banks allocate more than 20% of their total loans to contractors. Of that, almost half is earmarked for infrastructure (roads, bridges and so on ), leaving the minister to predict a credit crunch for housing in 2012, mainly among the smaller building companies - since two banks are already near the limit, Atias said, and a third is approaching it. He urged Fischer to raise the 20% limit, or exclude the allocation for infrastructure from the calculation. Fischer refused. The minister also confided that the Housing Ministry intends to release an "unprecedented" amount of land for housing development, in order to increase supply, which - Atias said - would stabilize housing prices, or even lead them to dip a little. But Fischer, to Atias' apparent astonishment, suggested that policy was risky and urged that the ministry slow the pace at which the Israel Lands Administration markets land for housing development, and also keep a lid on building starts while about it. (The ILA falls under Atias' purview. ) Atias pointed out that mere months ago Fischer himself had lauded the Housing Ministry's policy, including a massive release of land for development to increase the housing supply. "You constantly talked about the supply side," he reminded Fischer. The Bank of Israel commented that land should be marketed quickly for development, in order to narrow the housing shortage, which is one of the reasons housing prices have been rising. The Bank of Israel was among the first to warn of the shortage of land for development, it pointed out, and welcomes the "important steps" being taken. "That said, it would be better for housing prices to decrease gradually, not hard and fast," the central bank wrote in response. More thought should be given to the pace of housing development before irreversible steps are made. "A sharp drop in home prices, in contrast to the gradual decrease that the Bank of Israel feels is better, could cause difficulties in the construction sector and wind up hurting homebuyers. It is therefore important to preserve stability in that market," the central bank wrote.