Housing Market Still Refusing to Cool Down / Central Bank Considering Further Limits on Mortgages

One step the Bank of Israel is considering would be limiting variable rate loans linked to the prime interest rate to no more than 40% or 50% of the value of the property.

Despite numerous efforts to cool down the Israeli real estate market, homebuyers took out 17.5% more in mortgages in March, compared to February. Israelis took out NIS 4.7 billion in mortgage loans last month, the Bank of Israel reported yesterday.

The central bank is considering a number of steps to limit mortgages, partly in response to these numbers and also to try and reverse the rise in prices.

Stanley Fischer
Michal Fattal

One step would be limiting variable rate loans linked to the prime interest rate to no more than 40% or 50% of the value of the property.

Today, the limit is 60%. The Supervisor of Banks in the Bank of Israel, David Zaken, has recently met with the commercial banks on the matter.

The supervisor is also considering limiting other types of mortgage loans, and has asked the banks for detailed data on the mortgages they have granted. But the central bank has not yet made a final decision on such limits, which would be its third attempt in the last year to cool off the red-hot housing sector.

Sources say central bank Governor Stanley Fischer is waiting a few days more for March inflation numbers, which will be released today. Analysts estimate the consumer price index for last month will rise in the 0.2% to 0.3% range.

If housing price increases have slowed down, Fischer may put off any new limits for now, to protect first-time homebuyers. Zaken wanted to introduce the new limits at the beginning of April, but Fischer decided to wait.

Most of the new mortgages taken in March had a variable interest rate. A year ago in March 2010, the total amount of mortgage loans was only NIS 3.7 billion - and last month's figure represents a 23% increase.

Some mortgages are now more expensive after Fischer raised interest rates for April by 0.5% to 3% a few weeks ago.

This has particularly affected mortgages linked to the prime interest rate. For example, the average interest rate for shekel mortgages was 5.65% in February and rose to 5.72% in March. Variable rate mortgages rose from 3.8% to 4%, and CPI-linked mortgages went up from 2.58% in Februrary to 2.66% in March.

The Finance Ministry released data this week on the economy in February, and noted that the number of housing sales fell gently, as did prices. But the treasury attributed these small changes to fewer people buying homes for investment purposes.

Limits on mortgages have sent people looking for alternatives, which also raises the cost of mortgages.