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Ton of bricks /

Yesterday at 4 P.M., the Bank of Israel released a dramatic announcement, which left no room for doubt: Governor Stanley Fischer believes Israel has developed a real-estate bubble. The central bank is demanding that Israel's banks make special provisions for all home loans greater than 60% of the value of the property being bought.

Using different words, the formal language of bankers, Rony Hizkiyahu, the supervisor of banks, spelled it out to the banks: Apartments cost too much, and if you want to finance these bloated transactions, go for it - but you won't be able to book the loan as immediately profitable. You'll have to put these profits on the side and sit on them, because we are afraid housing prices are going to come down. If they do, you will lose money, and these profits you're sitting on will tide you over.

Hizkiyahu isn't preventing the banks from lending money as they wish. He is simply saying, they can't profit from it like they used to.

An hour and a half later, the Bank of Israel announced that its lending rate to banks would remain unchanged at 1.5% for June, which explains its need to make that first announcement.

Since the global economic crisis erupted in October 2008, central banks around the world, and here, have been keeping interest rates as low as possible. Their aim is to shore up their economies and the financial markets. Low interest rates are supposed to stimulate economic activity by making borrowing cheaper.

But in Israel the low interest rates had a dangerous side effect of skyrocketing home prices. Israelis aren't used to getting nothing on their bank deposits. They yanked out their cash and plenty put it into property, which resulted in a roughly 30% increase in home prices.

When banks are merrily lending as much as 80% of the value of a property whose value is inflated to begin with, you have a recipe for disaster should the trend turn.

Bank of Israel Governor Stanley Fischer would probably have preferred to continue raising interest rates so as to cool the real estate market. But he can't operate in complete disregard of developments around the world, and the world's central banks are keeping interest rates low for the nonce. The crisis in Europe ruined his plans to raise the local rates, as it signaled that the world economy is still sick. Fischer is using the only policy tool he can: he's taking aim at the boiling real state market without causing harm to the rest of the economy.