Overseas investors to suffer most from changing mortgage rules
Areas where foreign buyers cluster likely to see decrease in property values as changes take effect.
Desperate to stop the upward spiral of housing prices in Israel, the Bank of Israel has been changing the rules governing mortgages. The ones who will suffer the most from the changes will be overseas investors purchasing vacation homes or other properties in Israel.
Foreign buyers tend to cluster in specific areas. Property values in such areas are very likely to drop because of the new rules that are raising the cost of mortgages.
While announcing that interest rates for November would not be changing, the governor of the Bank of Israel dropped a bombshell on Israel's banks: a directive with new rules to quell the booming housing market. When the dust settled, it became clear that the average Israeli who is buying his first home isn't the target of the attack. The target is the costly homes that have been purchased with big loans.
Interest on Israeli mortgages is lower than on regular commercial or home-equity loans. This is because the banks have a lower equity-ratio requirement by the central bank on mortgages. Essentially, with the same amount of equity, the banks can lend more in mortgages than in other loan types.
Now the Bank of Israel has effectively put a stop to this lower equity ratio. Interest on mortgages will rise, which should depress demand for real estate. The directives don't apply to all mortgages. Home purchase loans that meet any of the following conditions are exempt:
1. A sum below NIS 800,000.
2. A loan for 60% or less than the value of the dwelling.
3. Anyone who has Housing Ministry eligibility.
4. Anyone who takes a fixed rate for at least 75% of the loan.
Evidently, the rules won't apply to local first-time buyers, but overseas buyers will be heavily affected. Not being Israeli, they are ineligible for Housing Ministry loans. Most buy on the high-end market, and borrow NIS 1.5 -2 million. Plus, with many banks overseas not allowing borrowers to withdraw equity from their local homes anymore, buyers will have to find more hard cash in order to purchase here.
The biggest debate is whether The Bank of Israel should be involved in macro-economic fiscal policies or whether its mandate should remain within the realm of monetary policy. The governor actually designed the new rules to protect Israel's banks. He learned from the mistakes made by U.S. and European banks, which continued lending against properties despite the peak in the cycles, creating a bust when prices declined. He is also protecting the general public. Lured by low interest rates, people take mortgages based on their current means, not realizing what the consequences will be when interest rises anew.
A second debate is whether these tweaks to regulations will be effective and will actually lower house prices. But the truth is, this is not the central bank's task. Reducing demand is a synthetic tool. Much has been said about the state releasing vast swathes of land for development in order to increase supply.
But little has been said about the fact that with current building costs being as they are, cheaper land is only part of the picture.
The government must not only reduce land prices: It has the power to reduce the price of cement - one of the biggest factors affecting costs in building - by opening this market to competition and weakening one of the most aggressive monopolies in the country. This, plus cutting tax on imported building supplies and more industrialization of the sector, could turn everyone's dream of owning a home in Israel into reality.
The writer is manager of the International Division at Mercantile Bank.