Israel's Mortgage Demand Soars in December as Real Estate Market Returns to Life

New home sales jumped 40% in November, with the biggest increase among those upgrading to larger properties.

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Israelis took out 5.5 billion shekels-worth ($1.4 billion) of mortgages in December, a 30% increase over the monthly average for the rest of 2014 and a 16% rise over December 2013, the Bank of Israel reported on Monday.

Industry sources attributed the year-end jump to “house cleaning” by mortgage banks, as branch managers rushed through applications before the end of the year to increase their bonuses. January, as a result, is likely to see a sharp decline in new home loans.

Nevertheless, the rise might also be connected with the 40% jump in new-home sales in November to about 10,000 – the biggest monthly number of 2014 – the treasury reported on Sunday. The biggest increase was among people moving up to larger homes, where the increase was 47%.

The residential property market went into a freeze in the second half of the year, as buyers and builders awaited Knesset approval of then-Finance Minister Yair Lapid’s plan to exempt many buyers of new homes from the 18% value-added tax. By late November, however, the coalition was beginning to unravel and the zero-VAT proposal never went to a vote, prompting buyers to return to the market in droves.

As a result, the Bank of Israel said that the value of new home loans for the year declined slightly to 51.6 billion shekels – 100 million shekels less than the record in 2013.

The abortive zero-VAT plan was one of a series of measures the last government tried to undertake in a bid to reverse the sharp jump in home prices, which rose 6.5% in the 12 months through October.

Also Monday, Moshe Kahlon – whose Kulanu campaign revolves around bringing down the cost of living – vowed to dismantle the government’s Israel Land Authority, which controls 95% of Israel’s land and critics say has acted to constrict supply of land for housing development.

“I have a detailed plan for breaking up the ILA. I will demand that whatever ministry I head will have authority over the ILA, so I can take personal blame if it isn’t dismantled,” Kahlon told the conference of the Israel Marketing Association.

Bankers said they expect the mortgage market to remain lively in coming months. People moving to bigger, more expensive homes are now typically buying their new property before selling their old one, in the expectation that prices will keep rising. To do that, they typically take a bridging loan for three years, which means holding two mortgages at the same time.

“We’re feeling the real estate market heating up a lot,” said one banker, who asked not to be named. “It’s happening because there’s so little construction Foreign buyers now constitute about 3-5% of the market, or 7,000-9,000 homes a year. If there’s a big increase in immigration, it’s clear that the current supply of housing won’t be enough for everyone and prices will rise.”

In 2014, the average new mortgage was for 630,000 shekels and was used to buy a home valued at 1.25 million shekels, according to Bank of Israel figures. That means about half the value of a newly acquired home is being financed. In 2014, borrowers were using 24% of their disposable income, on average, to repay their mortgage, it said.