New Mortgages Jump in December, Capping Record Year

Bank of Israel says quality of lending has improved, reducing risks to banking system.

Israelis took out 4.74 billion shekels ($1.35 billion) in new mortgages in December, the Bank of Israel reported on Sunday, marking a 1.7% increase from a year earlier and capping a record year of home loans despite efforts to rein in the borrowing.

The value of new mortgages taken out in December was 10% more than the monthly average for 2013, the central bank reported. The December figure was likely boosted by mortgage banks’ rushing to finish applications before the end of the year so that branches can meet their annual business targets.

All told for 2013, the value of new home loans climbed 10.9% from the year before to 51.7 billion shekels, the Bank of Israel said. The figures exceeded the previous record of 47 billion shekels set in 2010, before the social justice protests the following year and other factors caused a downturn in the market.

The Bank of Israel has been seeking to contain the growth of mortgages out of concern the borrowers are assuming too much risk by borrowing so heavily. That, in turn, could expose the banks to defaults and undermine the financial sector, as happened in the United States during the financial crisis of 2008-09.

The central bank’s latest restrictions, which were introduced in the last months of 2013, bar banks from making home loans if repayments exceed half the borrower’s monthly income. Nor can they grant mortgages where two thirds or more carries a variable rate of interest, which could leave borrowers paying much higher rates of interest later in the life of the loan.

But mortgages remain attractive − helping to fuel a sharp rise in home prices − because interest rates are low, the supply of housing is smaller than demand and many home buyers are expecting prices to continue rising, making an affordable home even more out of reach.

Although the value of mortgages continues to grow, the central bank has taken some solace from the fact that the quality of the loans has strengthened. Loan-to-value ratios (the size of the mortgage relative to the size of the property being bought) and loan-to-income ratios (how much a borrower is paying back as a percentage of his or her monthly income) have declined.

The percentage of fixed interest loans have grown to 40% of the total from 26% since the Bank of Israel placed its limits on mortgages.