Stanley Fischer- Emil Salman
Stanley Fischer Photo by Emil Salman
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The state of interest rates at present is not "normal," Stanley Fischer, the governor of the Bank of Israel, told the Knesset Finance Committee yesterday in a special discussion on Israel's housing shortage. In English: Interest rates are going to rise, and the governor is losing sleep over the thought that mortgage borrowers who took out floating-interest loans won't be able to meet future payments.

As interest rates rise, so will the cost of people's mortgages, and by a lot. Israelis have to realize that central bank interest of 2% isn't here to stay, Fischer warned.

There are some signs that the upward spiral of home prices is slowing, though it's too early to say whether it's a change in trend, Fischer told the parliamentarians.

Meanwhile, the central bank has taken steps to drive home the dangers lurking in floating-interest loans, not only to homebuyers but to banks - which are liable to see borrowers default. If housing prices start to fall and borrowers default, homeowners will forfeit their property and banks will get stuck with properties worth less than the loans taken to buy them. We have all seen the results of that in other countries over the last two years, the governor said.

That scenario is precisely what we must avoid in Israel, not only because of the direct effect of housing prices on would-be homebuyers but because of the implications for the stability of banks and the financial system, Fischer added.

The Bank of Israel's regulatory measures so far have included limiting banks' lending to purchasing groups, and requiring banks to increase their capital allocation for loans at floating interest rates with high loan-to-value ratios. "The Bank of Israel has other tools available," Fischer warned.

According to figures Fischer presented, Israeli housing prices have risen 35% from the start of the decade. During that time, Irish home prices rose 40% to their peak in 2006, while U.S. home prices climbed 50% before sliding back as the global financial crisis raged.

It's clear to everyone that the persistence of the upward trend in housing prices evident until very recently is likely to undermine the economy's financial stability, he said. The central bank can affect the demand side, but the solution should come from the supply side, which means government.