Central Bank Chief May Move to Dampen Mortgage Lending Further

But despite the rising prices, Karnit Flug notes some good news for potential buyers: the uptick in housing starts and completions.

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Bank of Israel Governor Karnit Flug has warned she might take further measures to tighten access to mortgages, saying that despite encouraging signs that supply and demand for homes was balancing, borrowers were taking on too much risk.

“We are still concerned about the rapid increase in mortgages and their share if total bank lending continues to grow,” Flug told TheMarker Financial Conference on Tuesday. “We won’t hesitate to take additional steps.”

Her remarks came as businesspeople and politicians at the forum pointed a finger at the government for the constant surge in home prices. The government estimates that prices rose more than 8% last year, putting the cost of a home increasingly out of reach for the average Israeli.

The Bank of Israel has stepped up requirements for taking out a home loan in the last several months, imposing tougher ceilings on how much borrowers can risk and under what terms.

But Moshe Kahlon, a former communications minister and consumer favorite for fomenting the revolution in cell phone rates, said the key to bringing down home prices was to force the Israel Lands Authority to make more land available for residential development.

“The ILA has land for 1,000 housing units in Be’er Yaakov,” Kahlon said in an interview with TheMarker editor Sami Peretz, citing an example of the agency’s policies.

“It tenders land for only 100. Why? Because it wants the money,” he added, referring to the higher prices caused by restricted supply. “Another year goes by and it tenders another 100. The state itself has raised the cost of land 60% in just half a year.”

Kahlon said housing policy should focus on first-time buyers who need to get a foothold in the market. Contractors should be encouraged to build smaller homes of 2.5 to three rooms. “Whoever builds three rooms the fastest, the best and at the lowest cost – the land is his,” he said.

At a real estate panel at the conference, Haim Freilichman, a former CEO of Union Bank of Israel, also blamed the government for failing to make enough land available.

“There’s no doubt that over the past five years the state has stopped releasing land and has created an imbalance between supply and demand,” Freilichman said. “Can you call it a bubble? I wouldn’t say that. It’s not like the American market. Mortgages here are structured differently. There’s no bubble.”

Ella Golan, head of the banking division at First International Bank of Israel, agreed that rising home prices didn’t represent a bubble, which is bad news for home buyers hoping to see prices eventually turn lower.

“I don’t see prices falling by 20%, certainly not in areas of high demand. The Israeli banking industry is more cautious and responsible than the Americans’,” she said, referring to the collapse of home prices in the United States, where the mortgage money that had caused prices to balloon dried up in 2007 and 2008.

Freilichman said the government should help first-time buyers as it did in the past, noting that many governments around the world did this. When the government provides stabilizing prices, investors will drop out of the market, he said.

"During the [2011] protests, prices froze. Why? Because people were sure prices were going to fall,” he added.

Flug said she was encouraged by the uptick in housing starts and completions, which at 45,000 and 40,000 last year are now running ahead of growth in demand. “If the trend continues – and the government makes sure that it does – and it encompasses areas of high demand, it will alleviate the pressure and stabilize prices,” she said.

Tel Aviv apartment buildings.Credit: Yael Engelhart

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