Construction Finance Banker Doubtful That Home Prices Will Fall

Bank Hapoalim’s Clara Zwergel says low interest rates, inadequate supply and the peculiarities of the Israeli market will prevent a sharp drop.

Clara Zwergel.
Ofer Vaknin

As head of the construction finance unit at Bank Hapoalim, Clara Zwergel is one of the most important bankers in the real estate industry and one of the most knowledgeable. Twelve years at the post and 30 years at the bank, which is Israel’s biggest lender, she deals with builders and developers daily and has her ear to the ground.

And what does she think about the question on every home buyer’s mind these days: namely, where prices will go?

Certainly not down, she told TheMarker. Interest rates are at record lows in Israel, supply is still exceeding demand and Finance Minister Moshe Kahlon’s flagship program to increase the supply of lower-cost housing – Machir L’Mishtaken – is yet to have an effect.

“We’re in a period of more than 10 years of rising property prices and, for the time being, as long as interest rates don’t rise – and even if they do – it won’t be dramatic,” she said.

Even after the big run-up in prices over the last decade, Zwergel doubts that Israel will suffer a bursting housing bubble like the United States did in 2008.

“In the U.S. luxury market, for example, buyers don’t pay until they get the property, while in Israel you pay a certain portion in advance or there’s a penalty. So in Israel it’s not likely we’ll have an extreme situation in which prices fall very sharply, as happened in the United States during the sub-prime crisis. Here, prices don’t fall because there isn’t a lot of supply – and there’s no supply that doesn’t fund demand,” Zwergel said.

She termed Machir L’Mishtaken – where the government sells land at a discount on condition that contractors pass on the savings to home buyers – as “generally a positive program.” But she said it was too early to say if it would work and, with less than 20,000 units tendered so far, it’s too small to have an impact yet.

“For now, the number of homes being marketing is small and even those who have won the lotteries for the houses haven’t reached the market. Until we see a massive quantity of homes, we won’t be able to say for certain if the program succeeded in bringing down home prices. In the meantime, it hasn’t happened – but it would be irresponsible of me to predict what will happen.”

What’s happening in the luxury housing market? Is it hurting because of tightening tax scrutiny on the part of the government? Are banks being forced to ask too many questions about where buyers are getting their money?

“In the luxury home sector, most buyers don’t take a mortgage. You can see, however, that today in Israel they’re building less for the luxury market. In general, there’s less residential construction because there’s a dwindling supply of land and a dwindling supply of cash. To reduce the risk, banks are requiring that developers show they have sold tens of percent of the project, though less than 50%. That reduces the contractor’s risk and the bank’s, too.”

What about reports that the banks are getting tougher on examining where foreign investors are getting their money to invest in real estate in Israel?

“There is the regulatory issue of the U.S. Foreign Account Tax Compliance Act (FATCA) and all the rules revolving around compliance concerning foreign bank accounts. As a bank we are in contact with developers, but we don’t examine the buyers of apartments. Depending on the need, that’s done by other groups.”

What about loans for developers building assisted-living facilities for the elderly?

“We also provide finance in this area, which has grown a lot as Israel’s population ages – even though for the time being there isn’t a lot of supply. The financial system, mainly the banks, finances construction of assisted-living projects, after which the developers are getting their financing from the deposits of residents and they don’t need bank finance.

“What’s important here is managing the need to provide services to the residents – if you don’t provide enough, residents will leave. In other words, a high level of professionalism is required and the developer has to remain with the project for the long term – and that requires good management.”