Household debt in Israel totaled 456 billion shekels ($115.3 billion) as of September 2015, equal to 41.7% of the gross domestic product, the Bank of Israel said in its semiannual financial stability report, released on Monday. Household debt grew at an annualized pace of 7.1% for the first nine months of the year, compared to 5.5% during the parallel period in 2014.
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Both housing debt and nonhousing debt accounted for the growth in household debt. At 83%, the great majority of nonhousing debt was owed to banks, although bank debt declined and debt extended by institutional investors rose.
Nonhousing debt grew at an annualized rate of 8% in the first nine months of 2015, compared to 6.1% for the parallel period in 2014. Housing debt grew at a pace of 6.5% in the nine months, compared to 5.2% in 2014. Most of the credit was extended by banks. The total sum of mortgages increased by 9% in the first nine months of 2015. The average risk for new mortgages during that period decreased slightly, as more borrowers sought fixed-rate loans.
The average mortgage was for 52.8% of the home’s value as of September, similar to the figure for September 2014.
Monthly mortgage payments were on average equal to a slightly smaller percentage of borrowers’ salaries, decreasing 1.5% between September 2014 and September 2015.
Only 3% of new mortgages were considered high-risk, defined as a loan equal to 75% or more of the home’s value, while monthly payments equal 40% or more of household’s income.
The bank noted that over the past few years, there has been a significant increase in the percentage of mortgages taken out with fixed interest rates, as rates hover at all-time lows. Over the past few months, as bank interest rates creep upward for fixed-interest loans, borrowers have begun taking out more variable-interest mortgages.
Beginning in mid-2014, homeowners increasingly refinanced their mortgages. Borrowers refinanced these loans to the tune of 2.67 billion shekels last year, equal to some 30% of all housing lending, a much higher figure than the long-term average. As borrowers refinanced loans to take advantage of low interest rates, this lowered banks’ risk.
The volume of refinanced loans started dipping in July, partly because banks raised the rates for fixed-interest loans linked to the consumer price index and partly because so many borrowers had already recycled their mortgages.
Despite the overall stability, Israel’s financial system remains exposed to the risks inherent in the real-estate market. Some 45% of all bank debt is tied up in mortgages or the real-estate industry, said the central bank.
The bank noted that a shock to the economy that pushes up interest rates or pushes down salaries could harm banks, and could also cause a quick drop in housing prices.
The bank noted that the percentage of apartments purchased for investment between April and July of 2015 was similar to the long-term average.
Israel’s financial system remains stable but could be at risk if China’s economic problems worsen and turn into a global crisis, the Bank of Israel further noted in its report.
It noted that threats to global financial stability have shifted from the advanced economies to the emerging economies.
“In particular, the risks derived from the Chinese economy, from the continued decline in commodity prices, and from the emerging markets with high foreign currency debt, have come into sharper relief,” it said.
But all of those risks should have a limited effect on Israel as long as they do not spread to the advanced economies and ignite a global crisis, the report said.
Among those risks, a crisis in China that may spread to countries that it trades with “was found to be more significant from Israel’s standpoint than the risk of a decline in commodity prices or the risk of a debt crisis”, especially if their currencies weaken sharply versus the shekel.
The central bank’s benchmark interest rate stands at 0.1% — down from 3.25% in 2011 — as a result of the slow recovery from the global financial crisis and a disinflationary trend that turned into deflation last year.
The Bank of Israel is widely expected to begin raising the rate later in 2016.