Fischer: Parents Buying Homes for the Kids Are Skewing the Market

Bank of Israel chief says the government is responsible for increasing the supply of homes.

It isn't the norm for young couples at the start of life to own a home, Bank of Israel Governor Stanley Fischer indicated yesterday. Elsewhere in the world, that's the case at least: in Israel parents help the kids to buy housing, which is actually skewing the market.

Speaking before the Knesset Finance Committee, Fischer said that while the central bank can take steps to head off a real estate bubble, the government is responsible for increasing the supply of homes.

Addressing the difficulty that young couples are facing in buying homes at current price levels, Fischer said that if home prices become out of reach for enough potential buyers, demand will fall and prices will decline. "In other countries, it's not customary for a young couple to buy a home," he said.

Since the beginning of the worldwide economic crisis in October 2008, inflation has run high, primarily because of rising housing prices, Fischer said. If housing is excluded from the CPI, inflation has been less than 1% a year.

For the rest of this year, inflation will continue to rise due to housing prices, the central bank foresees. But, Fischer said, the central bank expects that over the next 12 months, inflation will be back at the middle of the government-set price stability range of 1% to 3%.

The central bank chief expressed concern that home prices would affect rental prices, too.

On the supply side, Fischer said there are currently about 10,000 new housing starts per quarter, which he said is an improvement, though still not enough. The number of finished housing units is also increasing. Meanwhile, however, housing prices are still rising. "Since 2008-2009, housing prices have been increasing very quickly, and that's our problem," Fischer said. "We are looking more similar to countries that have had a [real estate] bubble."

He attributed part of the increase in home prices to low interest on mortgages.

"If we have to increase interest rates, we will do so, and people will no longer be able to meet their mortgage payments, which causes a lot of problems," he said. "For this reason, the supervisor of banks [Rony Hizkiyahu] recently issued new directives on highly leveraged variable-rate mortgages. The supervisor is attempting to reduce the use of variable-rate mortgages."

Regarding the recent decline of Israeli exports, Fischer said, "We are very concerned about what is happening with exports," but that the ratio between exports and imports is in Israel's favor, which is good for economic growth.

He rejected criticism over the central bank's large dollar purchases. The bank's foreign currency reserves are worth about $70 billion, but are diversified among a number of currencies, he said.

Fischer added that he does not support buying gold because of its price volatility.

"Our investments in foreign currency are very conservative, and they will stay that way," he said, adding: "I don't see foreign currency purchases as posing a risk to the economy. We are in a very special situation, because we have problems no one else does, geopolitical problems, for example. Our foreign currency reserves are not a problem and not a risk, but rather a solution and an asset for the country. If there's a problem with exports, that's why we have about $70 billion in reserves."

Regarding the shekel exchange rate and the central bank's intervention in the foreign currency market, Fischer said: "That determines the price that exporters receive for exports, and that determines the extent of their profits and their capacity to continue to produce and export. When [the shekel] appreciates, that hurts exports. The trend is that the currencies of emerging markets are suffering from appreciation. It is not possible to buck the trend, but it can be moderated. We cannot prevent it."

Fischer said the appreciation of the shekel has been more moderate than the comparable situation in Brazil, Australia and other countries where economies have resumed growth. He said an effort was being made to give the exporters time to become more efficient so they can export at lower prices and compete more efficiently in countries with growing economies, notably in Asia.

Without the intervention of the Bank of Israel, the shekel would have appreciated much more, Fischer said.