Bank of Israel Moves to Cut Mortgage Rates

Step comes as treasury figures show that the residential property market is heating up again

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Residential building construction in Ramat Beit Shemesh, October 26, 2020.
Residential building construction in Ramat Beit Shemesh, October 26, 2020.Credit: Emil Salman

Amid continued signs that the residential real estate market is heating up, the Bank of Israel announced on Monday it was ending its ceiling on the portion of mortgage rates linked to the prime rate, a move seen as spurring even more demand by home buyers.

Under the new rules announced by the supervisor of banks, the Bank of Israel will only require lenders to set a third of a new home loan at a fixed rate of interest. The rest of the loan can be set at whatever interest rate option the borrower asks for.

Since the prime rate right now is so low, that will become the default option for borrowers and make taking out a home loan more attractive than before.

News of the decision sent bank stocks lower on the Tel Aviv Stock Exchange while shares of property companies soared. Mortgages account for 40% of Israeli banks’ total loan portfolio, or about 395 billion shekels ($121 billion), and have been growing even as the coronavirus depresses the rest of the economy. The TA Bank index fell 0.4%.

The TA Real Estate index ended the day up 3.5% with property developers Azorim and Africa Residences jumping 13.2% and 15.1%, respectively, for the day.

“In light of prevailing conditions in the market today, we believe it is appropriate to remove the limits on the prime component in the mortgage mix,” said Banks Supervisor Yair Avidan. “The current step will make it easier for the borrowing public to take out mortgages and will increase the range of financing options they have.”

The Bank of Israel reasons that the record low prime rate of 1.6% will remain in place for sometime as central banks in Israel and elsewhere keep to easy monetary policies. The result is that borrowers can count on lower mortgage rates for years to come and therefore lower mortgage costs.

Meanwhile, the Finance Ministry’s chief economist released figures on Monday showing that residential real estate investors were flooding back into the housing market. Their share of all home purchases in October reached 18%, down from a peak of 30% before former Finance Minister Moshe Kahlon took measures to deter them but higher than the recent low of 14%.

Investors bought 1,400 homes in the month, up 83% from the same time in 2019. The increase was set off by Finance Minister Yisrael Katz’s decision to lower the property purchase tax on investors at the end of July. Investors were particularly active in cities, such as Tel Aviv and Acre, where they accounted for a third of home purchases and were competing with people buying homes as their primary residence.

Home sales of all kinds rose 20% from a year ago to 7,700 in October.

They were down 19% from September but that wasn’t due to any change in market sentiment but rather to the timing of the High Holy Days, which this year occurred mostly in October, and to the imposition of the second coronavirus lockdown for one month from mid-September. Both factors caused buyers to move forward with their plans.

Treasury Chief Economist Shira Greenberg said that in addition to investors easily identified by statisticians because they own more than one property, there was also a class of “disguised” investors. These are investors who, for example, rent the home they live in and rent out the one they own.

Among the cities where investors had a particularly strong presence are Beit Shemesh, where they bought 27% of all new homes in October. The city is undergoing a change from a mixed community to an entirely Haredi one, presenting more rental opportunities for investors.

That reflects a growing trend in the ultra-Orthodox market, where rising prices means families have to settle for smaller, older apartments if they want to buy. Renting gives them the option of living in a bigger property. Property companies, such as Megureit, have responded to the phenomenon by developing rental properties in Jerusalem and Bat Yam.

In addition to investors, first-time buyers (young couples) bought about 3,900 homes in October, an increase of 9% from a year earlier. Discounting homes bought with government subsidies under the Mechir L’Mishtaken program, the increase was 31% year on year.

The strong demand for homes was also reflected in data from the Central Bureau of Statistics, which on Monday said that in the August-October period, 14,300 new homes were sold. That was an annual rate of 60,400 units, above this year’s forecast for housing starts expected to go on the market in the next few years.

The reason for the slowdown in starts, industry sources say, is because the Israel Lands Authority has been marketing land for development at such a slow pace.

Meanwhile, Mechir L’Mishtaken – the flagship effort by Kahlon to lower home prices when he was finance minister – is gradually fading from the market, treasury figures showed. As a result, buyers who had been sitting on the fence hoping to get rights to buy a subsidized home have returned to the free market, turning up the demand pressure.

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