Mortgage Lending Far Outpaces Builder Loans

Hapoalim and Leumi make loans of NIS 35 billion for home purchases from 2009-2012, but just NIS 15 billion for property developers.

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Israel's two biggest lenders – Bank Hapoalim and Bank Leumi – increased their mortgage lending at more than double the rate at which they made credits available to builders.

An examination of lending by the two banks between 2009 and 2012 shows they made new net loans of some NIS 35 billion for home purchases, but provided just NIS 15 billion in new loans to property developers. It also indicates that the disparity picked up over the years.

At Hapoalim, for each additional shekel the bank loaned in 2010, it made NIS 1.22 in new mortgages. By 2012 it was making NIS 3.50 for every shekel loaned. Leumi was making NIS 1.61 for every shekel loaned in 2010 and NIS 9.36 last year.

Over the three-year period, total mortgages grew 2.3 times faster than all lending to builders, a factor that helps explain the rise in home prices in recent years.

Banking executives attributed the trend to a failure of the construction market, namely the government's inability to make enough land available for developers to build in areas where there is housing demand. To that, they added, there is the planning bureaucracy, which increases the time, cost and risk of residential construction.

The banking industry's claims were backed up by a Housing and Construction Ministry survey released on Sunday that found that more than third of contractors polled cited delays in approvals as "severely restricting the industry's activities."

But the ministry blamed the banking industry for high prices.

"The rise in home prices and the increased number of homes under construction have exhausted the credit available to the industry," the Housing and Construction Ministry said in a statement. "Undertaking new [construction] projects requires additional credit, often at higher interest rates and fees on top of the shortage of equity capital for builders."

Nissim Bublil, president of the Israel Builders Association, said the industry is suffering a credit shortage.

"When a product is in short supply, the first thing that happens is that the price goes up," Bublil told TheMarker, referring to credit availability. "The cost of financing residential projects with bank loans has risen 50% even though the Bank of Israel has lowered interest rates."

The cost of financing accounts for 4% of the final price of a new home, double the rate in the past, estimated Bublil. In shekel terms, that works out to an average of NIS 57,400 per home, compared with NIS 38,400 in 2011. Among the fees banks are charging builders is one for failing to make use of loans granted to them.

Contractors typically take out two kinds of loans from banks – a standard credit used to finance construction and a legally required guarantee that is meant to protect buyers in the event the developer goes bankrupt.

The figures from Hapoalim and Leumi show that actual loans to contractors didn't grow at all in the last three years. The guarantees, however, have grown from NIS 24.3 billion to NIS 39.7 billion.

Leumi has already reached the ceiling set by the Bank of Israel for property lending: 20% of its total loan portfolio. The bank could reduce its lending to infrastructure projects and put more into residential building, but it likely regards infrastructure as less risky.

Banking industry executives say lenders will no longer make loans to buy land unless a building plan has already been approved. The aim is avoid speculative lending that would contribute to a bubble.

Most of the loans for real estate development these days, says a building industry source, go to older, established developers. Smaller developers can usually expect to get no more than the guarantee required by law.

The rest of the financing typically comes from the home buyers.

The Bank Leumi logo on the front of the company's headquarters in Tel Aviv, Israel.Credit: Bloomberg

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