The Bank of Israel said Tuesday it was imposing new restrictions on home loans, just hours after the government reported that home prices had jumped 5% last year. In a draft directive presented by banks commissioner David Zaken, lenders will have to boost their capital buffers on mortgages exceeding 45% of the property value.
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Zaken said the move was due to the recent expansion in housing loan portfolios, along with a sharp increase in prices, without an appropriate increase in capital buffers and provisions. "These developments have led to higher inherent risk in the loan portfolios of banking institutions," he said.
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 is also setting 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. This reflects a belief that the banks don't adequately recognize the risks involved in their mortgage activities.
"These directives are meant to provide a more accurate portrayal of the risk inherent in the banks' portfolios of housing loans, in terms of both capital allocation and bad-debt provisions," Zaken said. "This should reinforce the banks' capabilities to absorb losses without reducing their ability to provide funding for the economy's needs."
The government has been struggling to contain a rise in housing prices, but its efforts have been thwarted by contradictory policies. The Bank of Israel has lowered interest rates, making mortgages cheaper, while imposing new restrictions on how much banks can lend to home buyers and construction firms. Meanwhile, the Israel Lands Administration sold less land last year for development, and housing starts have been falling.
Housing prices climbed 5% in 2012, according to a review released Tuesday by the government assessor's office, which added that prices in the fourth quarter had risen an average of 1.6% from the previous quarter.
"The echoes from the social protest that arose in the summer of 2011 have been forgotten, and its effect on housing prices isn't reflected in the surveyed quarter," wrote chief government assessor Tal Alderoti.
The assessor's survey is deemed the most relevant of its kind for the country because it only includes four-room apartments, considered the most prevalent and homogeneous type of housing in the market. The study also splits its findings among the 16 cities with the most transactions.
Tel Aviv and Be'er Sheva experienced the largest year-over-year increases, with prices surging 9%. But prices in Tel Aviv eased 1% in the fourth quarter from the third quarter, while prices in Be'er Sheva rose 2%.
In Herzliya, Haifa and Rehovot, prices for four-room apartments increased 7% in 2012. The only city where prices failed to rise was Ashkelon, which saw a 1% drop.
"There is unfortunately almost no inventory of apartments for sale, with most units in projects under construction already sold," said Nissim Ahiezer, CEO of construction firm Dunietz Bros.
"In the past year the ILA hasn't marketed enough units in the large cities, so prices are going up. Rishon Letzion, for example, attracts many home buyers, but in the last few years there have been fewer building starts in the city, so the 4% rise in prices isn't surprising."