Bank of Israel Warns of Risk to Banks as Household Debt Surges

Mortgages have led growth in borrowing, but household indebtedness still low by Western standards.

Amidar housing in Beit She'an.
Yuval Tebol

Israeli household debt has surged 55% since the outbreak of the global economic crisis in 2008 to levels that could pose a threat to the country’s banking system, the Bank of Israel said on Sunday.

“These developments expose lending banks to risk from the household sector, should there be a sharp and rapid turnaround in the housing market, especially if together with the turnaround there is an increase in the interest rate or a recession and negative impact on borrowers’ income,” the bank warned.

The sharp increase left households carrying debt of 412 billion shekels ($120.5 million) as of the end of March. But compared to other developed countries, Israeli consumer debt remained a relatively low 39% of gross domestic product, the central bank said in a preview of a financial stability study to be released shortly. In the United States the level was about 83% at the end of last year, after peaking at about 95% in 2009; in Britain, it was about 97%.

Moreover, since the end of 2007, the ratio of Israeli household debt to GDP has only risen by two percentage points, the Bank of Israel said, while relative to disposable income it didn’t change at all.

The government has been seeking to rein in the rapid rise in home prices. While most officials present the problem of high housing prices as a burden on the middle class, the Bank of Israel is concerned that a sharp reversal in the trend could leave banks holding tens of billions of shekels in bad loans, a scenario similar to what happened in the U.S. six years ago.

The central bank’s concerns are underscored by the fact that consumer debt related to housing grew at a faster pace in recent years than anytime in Israel’s history. After growing an average of 8% in the past seven years, housing debt accounted for 70% of the average household’s debt and 30% of Israeli banks’ total loan portfolios at the end of last year, the central bank said.

When factoring in household assets and liabilities, the study found that Israeli households were more highly leveraged in 2012 than they were in 2006. Nevertheless, on average, they still had a positive net worth and the extent of leveraging was lower than in other developed countries.

The central bank expressed concern that lower-income families were especially vulnerable to a downturn in the economy and a rise in unemployment. This, it noted, was especially the case as Israel suffers higher levels of income inequality than other developed economies.

In the 2007-12 period, the bottom decile of households with mortgages were using 29% of their monthly pre-tax income to repay home loans, even if they amounted to an average of just 1,000 shekels. At the top two deciles, the rate was just 14% of pre-tax income.