Mortgage Borrowing Isn't Cooling Despite the BoI's Best Efforts

For all the Bank of Israel's efforts to cool  the housing market, bankers predict a sharp increase in the volume of mortgage loans this month.

Just yesterday the Bank of Israel imposed new restrictions on mortgage lending, but bankers suspect its moves aren't having the desired effect.

The total volume of mortgages is expected to reach NIS 4 billion this month, the bankers predictm, which would be a 33% increase from the same time last year.

That would meet or exceed January's figure of NIS 3.97 billion and the monthly average of NIS 3.89 billion in 2012.

The February figure suggests that the central bank's effort to curb housing prices by making it harder to borrow money is so far ineffective. Tuesday's move, which ensures banks have adequate capital to cover possible losses on their mortgage portfolios, was the latest in a series of measures Bank of Israel Governor Stanley Fischer has taken to cool the market.

Nationwide, home prices rose by 1% in December, compared with the previous month and were 6.7% higher than in December 2011, the Central Bureau of Statistics said last week.

The Bank of Israel issued the new directives with the belief that lenders are failing to adequately assess the risks entailed in granting mortgages at a time when prices are so high.

"Our message is that we see a greater risk in the mortgage activity than the banking system itself does," Banks Commissioner David Zaken said when he issued the directive.

Bankers say the effect of the new directive will be to raise interest costs on home loans, thereby offsetting the low base lending rates set by the Bank of Israel that have made mortgages cheaper.

Fischer lowered the base rate, which is currently 1.75%, in a bid to lift sagging economic growth. By forcing the mortgage banks to raise their rates, Fischer hopes to cool the housing market while warming up the rest of the economy.

The Bank of Israel's great fear is a scenario where many homeowners can't meet their mortgage payments due to an economic slowdown and rising unemployment.

Addressing this concern, Zaken told the banks that on mortgages covering 45% to 60% of the property value, banks will need to set aside 50% in capital instead of 35% while for those covering more than 60%, banks will have to set aside 75%. Zaken also set a new floor on debt loss provisions for home loan portfolios at 0.35%, up from an average reported rate of 0.22% at the end of the third quarter.

The higher provision requirements will oblige the banks to set aside some NIS 300 million in capital in their first-quarter balance sheet. A third of that will come from Mizrahi Tefahot, which is the biggest player in the home loan market.

The Bank of Israel told banks in December to increase their loan-to-value ratio to 50% for property investors and 70% for most other borrowers. But the official figures for January and the estimates for February suggest that did little to deter demand for loans.

Fischer and other central bank officials have said they have limited means for reining in home prices and that the government must address the problem from the supply side by enabling the number of housing construction starts to grow.

In the first 10 months of 2012, however, housing starts were 20% lower than the same time in 2011. Furthermore, the pace of land sales by the Israel Lands Administration has also been on the decline.