Housing prices in Israel rose tens of percent over the last decade, yet in spite of warnings from the Bank of Israel, credit rating agencies and others about the dangers, the real estate market to this day remains stable and profitable.
The market is still boiling, as the figures for mortgages released on Monday by the Bank of Israel show. The public took out 67.6 billion shekels ($19.5 billion) in new home loans in 2019, a 14% increase over 2018 and exceeded the 2015 record of 65 billion shekels.
Sources in the banking industry said they believe that the trend would continue this year.
The main reason for the spike in mortgages was a government program, which offered lower-priced housing to qualified buyers via a lottery. The program is the centerpiece of Finance Minister Moshe Kahlon’s drive to rein rising housing prices.
However, Kahlon has said he will be leaving politics after the March 2 election, leaving the fate of his flagship program in doubt. The Central Bureau of Statistics said home prices had risen a relatively modest 3.4% over the past 12 months.
But both it and the treasury say home sales have been rising while the number of new housing construction projects has been in decline, which could lead to an acceleration of spike in prices.
Banking sources said they are not surprised by the jump in new mortgages. That is because in the second half of 2019, tens of thousands of Israelis who had won right to homes under the program’s lottery had finally been notified that the building permits needed for contractors to begin construction had come through. In many cases they had been waiting for 2-3 years.
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With the permit in hand, buyers could sign contracts and contractors were entitled to the first down payment. Buyers then applied for a mortgage.
The banking sources said the jump in mortgage applications through the lottery would continue this year because some 50,000 home contracts under the program would be signed this year.
The number of tenders for contractors is expected to be reduced in 2020, though only temporarily, but that won’t be felt in the mortgage market until 2021 because of the time gap.
The bankers warned that home buyers under the program were taking out mortgages at relatively high loan-to-value ratios.
Indeed, according to the Bank of Israel, the biggest growth in home loans occurred last year in the threshold of borrowers who financed 60-75% of the home’s purchase price through a mortgage.
In December 2019 alone, banks granted 7.16 billion shekels – a 23% increase from a year earlier – in mortgages to 10,215 borrowers – the highest number since August 2015.
The Bank of Israel figures showed that between March and December of last year, the lottery program accounted for 17% of all home purchases. The program accounted for 12% of all mortgages by value, or 7 billion shekels.
Another part of Kahlon’s housing strategy was to drive property investors out of the market to make room for people buying homes to live in. However, the Bank of Israel data that investors have returned to the market. Last month, they took out 1,434 loans, the largest number in five years, totaling 901 million shekels.
For all of 2019, the value of mortgages taken out by investors was 20% higher than in 2018. However, it is still too early to tell whether they are coming back to the market to the extent they had before 2015, when Kahlon took office.
“While the presence of investors has declined dramatically, they haven’t disappeared entirely,” Tal Bar-El, the head of mortgage lending at Bank Leumi, said in a recent interview with TheMarker. “They’re buying properties, but they are selling more than they’re buying, so the net effect is that they’re not in the market.
“In a low interest rate world, if you can earn a return from a house of 5-6% in the periphery [of Israel] and 3-4% in the center, that’s not at all bad. And, if the value of the house rises 10-20%, as well, and then exit, that’s even better. If investors don’t think there’s a better alternative, they’ll be coming back to the real state market,” said Bar-El.
Another factor that has kept the property market strong, the Bank of Israel noted, was falling interest rates for new mortgages – a decline that has encompassed all interest-bearing instrument – even if the spread with government bonds remains 150 basis points.
Meanwhile, the central bank said the rate of mortgage repayments had risen, too. In 2019, it reached 9.1 billion shekels, up from 5.8 billion the year before.
The biggest beneficiaries of the surge of home loans and rising property prices is, of course, the banks, which have shifted more and more of their lending to mortgages. After they succeeded in overcoming their capital adequacy problems, lenders are now free to compete for home loans.
Banking sources say the competition has grown intense, even though other financial service companies, such as institutional investors, the credit card companies and non-bank lenders – are almost entirely absent from the mortgage market, leaving the banks the playing field for themselves.
The segment generates big profits, has a low level of bad debt that lenders end up writing off and enjoys strong demand, mainly because of Machir L’Mishtaken.
The combined loan portfolio of the five big banks in Israel – Hapoalim, Leumi, Mizrahi Tefahot, Israel Discount and First International – grew 7.7% in the first nine months of 2019 from a year earlier to 367 billion shekels. Discount led the pack, with a 13.3% increase to 36 billion shekels.
That increase in their portfolio translated into a 10% increase in revenues generated from it, or 1.32 billion shekels net – a 19% rise from the same time in 2018. Mortgage profits now account for 15% of the banks’ total, according to Bank of Israel figures.