Israel Central Bank's Glum Forecast: Mortgage Woes, Fewer Restaurants

'The harm to the earning potential of so many households is liable to endanger their resilience and challenge the financial system,' central bank says

Avi Waksman
Avi Waksman
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Herzl Street in Netanya during the coronavirus crisis, July 20, 2020
Herzl Street in Netanya during the coronavirus crisis, July 20, 2020Credit: Eyal Toueg
Avi Waksman
Avi Waksman

The cutbacks in the private sector and the sharp increase in unemployment may drag Israel’s economy into an extended period of cutbacks in private consumption, less spending within the business sector, and damage to Israel’s tourism, culture, entertainment and even high-tech sectors, according to an analysis released Wednesday by the Bank of Israel.

“It’s likely that due to the losses due to the lockdown, many employers will need to increase efficiency,” states the central bank's economists.

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The analysis, released as part of the bank’s periodic report into Israel’s financial stability, will be published in full soon. It addresses the concerns of employees and businesses and how they relate to the financial system.

“The harm to the earning potential of so many households is liable to endanger their resilience and challenge the financial system,” states the central bank.

One of the main risks to the banks is their mortgages portfolios, which have ballooned over the past few years, the central bank states. A large percentage of mortgages in Israel are currently frozen and a certain percentage of households will not be able to go back to paying them once they’re unfrozen. The frozen mortgages will ultimately have higher monthly payments or have to be refinanced over a longer period of time.

The central bank also cautions that the banks may see customers who can’t repay other types of loans, While the banks have a smaller consumer loan portfolio, the risk is higher than with mortgages, as these loans are not backed with an asset.

However, the central bank notes that Israeli households aren’t particularly highly leveraged. In 2013 the central bank capped monthly mortgage payments at 50% of a household’s income. Currently. some 60% of mortgage payments are for no more than 30% of the household’s income.

The bank notes that the crisis struck quickly and deeply, and doesn’t resemble any of Israel’s previous economic crises. It has struck more sectors than the previous economic crisis in 2008-2009.

As a result, the economists forecast a change in consumption patterns. In particular, people are likely to cut back on expenses they consider luxuries or unnecessary, particularly restaurants, culture and entertainment. These sectors are already among the hardest hit by the crisis.

Meanwhile, the public is expected to be spending a larger portion of its income on paying back loans. A survey conducted by the Israel Democracy Institute found that only 9% of self-employed and 18% of employed Israelis don’t have monthly loans to pay off.

Loans may become more expensive due to the increased risk, despite the central bank’s attempts to keep down the cost of borrowing. The bank forecasts a reduction in consumer borrowing which over the past few years fueled purchases of items such as cars, among others.

The shift to working from home is also expected to bring changes in consumption habits. “People who don’t leave home don’t enter stores on the way home, and apparently buy less overall,” states the report. More Israelis working from home is likely to reduce the consumption of public transport and prepared food, the report states.

The bank forecasts unemployment of 6% by the end of 2021, or even 9% under its most pessimistic scenario.