Israel's Wages Not Keeping Pace With Mortgage Debt

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The combined mortgage debt of Israelis has grown 35% since 2005 − faster than wagers − the Housing and Construction Ministry said in a report obtained by TheMarker due to be released at the end of the week.

Although the Bank of Israel has over the last several months imposed limits on new home loans in a bid to contain demand and the rise in home prices, mortgage debt and the risk homeowners are bearing has grown, the ministry writes.

It warned that a major change in the economic environment, including a spike in inflation or an increase variable mortgage interest rates, could create real problems for homeowners if their take home pay doesn’t rise proportionally.

The report, which appears in the ministry’s quarterly journal, warns that unlike those who own rental properties and can rely on rent as an income stream to help meet mortgage payments, individual homeowners don’t have any cushion.

The median price for a new home was NIS 1.38 million in the first quarter of the year, according to the ministry, 7% higher in nominal terms than the same time last year and 5.5% more when adjusted for inflation. The median price for a used home in the first quarter of this year was a NIS 1 million, 9.6% more in inflation-adjusted terms than a year ago.

The pace of residential construction starts could continue to expand to 45,000 or 50,000 a year, the authors of the report say, but only if the cabinet resolution requiring the Israel Lands Aduthority to meet a goal of tendering land designated for 25,000 new home a year is met. But, over the past five years, the average annual rate was just 18,000.

A proposed purchase tax of 3.5% on homeowners trading up to more bigger, more expensive homes will add about NIS 50,000 on average to their cost, the report noted. However, the tax will almost certainly cool demand for the category, which represents about 36% of all home sales.

On the other hand, the new tax, the report said, might also encourage people buying their first home to purchase a more expensive one to avoid having to trade up later and pay the tax. In the short term,
it could create a flurry of demand for expensive homes as people rush to buy a property before the tax takes effect, the report said.

Illustration: Mortgage bankers at work.Credit: Ofer Vaknin

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