Bank of Israel: Arab Citizens of Israel, 21% of the Population, Hold Only 2% of Mortgages

Israel's central bank cites problems in Arab towns like disorderly land registries and difficulty repossessing homes as the main barriers to getting mortgages

A street in the Arab Israeli city of Taibeh.
AP Photo/Ariel Schalit

Only 2% of Israelis obtaining mortgages are Arab, the Bank of Israel reported in an analysis that the central bank released on Tuesday. The 2% figure is particularly low considering that Arabs are 21.4% of the country’s population.

The situation is similar even among Arab residents of cities with mixed Jewish and Arab populations, such as Jerusalem, Haifa and Ramle, where their collective proportion of the population of the cities is 24% but they are only 4% of mortgage recipients. The study also found that in mixed cities on average, Arabs received mortgages at interest rates that were slightly higher – a tenth of a percentage point more – than the average interest rate Jews received on mortgage loans. Among homeowners in Arab locales, the average interest changed was three tenths of a percentage point higher than in Jewish locales.

The central bank said the disparity was measured after factoring in influences such as the risk of default, and said it apparently is a result of the difficulties banks have in getting the loans repaid in the event of default, which requires selling the property. The Bank of Israel also suggested that the difference could be the result in part of other factors such as the stability of employment of Arab mortgage borrowers.

The Bank of Israel explained that the purpose of its study was to analyze the mortgage market in Israel’s Arab community and to figure out why Israeli Arabs are so underrepresented among mortgage recipients, including any structural deficiencies in the housing market for Arab Israelis. The study was based on a complete database of mortgage loans provided by the country’s banks between 2010 and 2014.

One suggested possible explanation for the seemingly lower access to mortgage loans among Arab Israelis and the slightly higher interest rates that they pay on average is problems with land registries in Arab communities and the resulting difficulty in arranging to provide the homes that are being purchased as collateral for the mortgage loan. In fact, the lack of proper land registries in Arab communities and the difficulty in repossessing a home there in the event of default were seen as leading causes of diminished access that Israeli Arabs generally have to mortgages and the higher interest rates that they sometimes pay.

Another factor cited is the relative lack of competition among banks in providing mortgage loan credit to Israeli Arabs because the country’s banks have tended in the past to shy away from providing mortgage loans in the community due to the difficulties that the banks have experienced in issuing the loans and in repossessing the properties in the event of default. Nonetheless, the Bank of Israel noted, there has been about a 90% increase in the number of bank branches in Arab communities over the past decade, which is bringing about an increase in competition.

“Against the backdrop of these structural problems on one hand and the growth that has been seen in recent years in the banks’ focus and activity in the Arab community on the other, some of the banks have begun to offer long-term loans (of more than 10 and even 20 years) for housing to the Arab community without mortgaging property,” the central bank report noted, adding that the interest charged on the loans is higher because the debt is unsecured.

To address the relative dearth of mortgage financing in the Israeli Arab community, the central bank report recommends that government programs be instituted to boost the availability of housing financing and to improve the loan terms by putting the land registry system in Arab locales in order. That, the central bank concluded, would make it easier to provide their homes as collateral and reduce the risk to the lender.

The Bank of Israel report cited as a step in the right direction a program in place sponsored by the government and the Economic Development Authority for the Arab, Druze and Circassian sectors, which is part of the Prime Minister’s Office. The program is expected to make mortgage loans more available by encouraging higher density construction on government-owned land. The homeowners in the program will also be able to register their properties on the land registry.

Responding to the report, the Association of Banks in Israel said in part: “In recent years, the banking system has been devoting major effort in improving access to credit in the Arab community to overcome the structural problems there. As part of this effort, the network of branches in Arab communities has grown by 90% over the past decade, compared to an increase of just 4% in the number of branches in Jewish communities.”

In recent years, the statement noted, the expansion of bank branches in Arab communities has particularly accelerated and efforts have also been made to provide a wider range of loan options to meet the needs of the Arab community “to provide alternatives to borrowers who are not able to mortgage their properties as [collateral] for a home loan.” The banking association said it is also working with government officials to address the general issue, including the problem of the lack of proper land registries in Arab locales.