Mortgaging Their Future

The latest surge in housing purchases raises an old question: Are the people taking out these mortgages assuming obligations they won’t be able to meet?

Israelis these days seem conflicted. On one hand, people are constantly grumbling about the unprecedented increase in fuel and food prices, and many say they’re considering leaving the country. On the other hand, people are investing their entire future in this country: In August, the number of new mortgages jumped 20% versus July, to total NIS 6 billion. This came on top of the sharp increases witnessed in June ‏(NIS 3.9 billion‏) and July ‏(NIS 4.9 billion‏).

This is up 76% from the monthly average of NIS 3.4 billion for the preceding six months. Apparently, just before September’s one percentage point increase in VAT kicked in, people got fed up waiting for prices to drop and rushed to buy. The implications are clear, and the surging demand is bound to raise prices yet again.

Israelis may dream of Canada, but many are committing to pay thousands of shekels a month through retirement in exchange for an apartment here. Are the borrowers assuming obligations they won’t be able to meet?

Bank of Israel figures show that in July, the largest single group of borrowers were people buying apartments worth NIS 1.2 million to NIS 2 million. Most Israelis borrow 60% to 75% of the value of their apartment. The number of such large mortgages grew by 25% to 30% last year. This means hundreds of thousands of Israelis have taken on loans of NIS 700,000 to NIS 1.5 million.

“I’m not sure what will happen,” says Yariv Dahan, whom we interviewed in a Petah Tikva mall. “My colleagues at work are taking out mortgages to buy apartments priced at NIS 1.4 million to NIS 1.5 million. They put down NIS 400,000 or NIS 500,000, which means they have to borrow about NIS 1 million. Interest rates are currently low and with both spouses working, they believe they can afford to pay NIS 5,000 a month. But when they have children and have to start paying NIS 4,000 a month in child care, mortgage payments are no longer that easy. I live in a four-room apartment and could never afford five rooms, since I’d need another NIS 200,000, which I don’t have.”

Most mortgage payments are set at 20% to 30% of the borrower’s income. The number of mortgages meeting these terms increased 31% last year. In terms of types of interest rates, the most significant increase was in unlinked mortgages bearing variable interest, although most loans carry variable interest and are linked to the inflation rate. A rough calculation shows that a 20-year, NIS 1 million loan of this type means NIS 5,000 monthly payments. If the Bank of Israel’s interest rate increases by half a percentage point, then the monthly payment increases 10%.

The inflation rate is also a factor. It was 15% for the last five years, and 200% for last two decades. Yet salaries are rarely adjusted when prices increase. It seems that many borrowers fail to calculate how inflation and higher interest rates may affect their payments.

Undeterred by two mortgages

We met Eran from Binyamina and Matan from Rishon Letzion at a Netanya cafe. While Eran is not considering buying a home right now, Matan’s story is complicated. He lives in a rented apartment in Rishon Letzion, and is renting out an apartment he bought three years ago for NIS 700,000. His makes monthly mortgage payments of NIS 3,900, which is mostly covered by the NIS 3,200 he collects in rent.

Now he is about to purchase a NIS 1.85 million penthouse in Yavne and intends to take out a NIS 1 million mortgage, which means monthly payments of NIS 4,200 to NIS 5,000 for the next 20 years. He is not deterred by the prospect of holding two mortgages. His experience is that interest rates are low and housing prices always go up, which means any real estate transaction is profitable, he says.

There are many others like Matan. Interest rates have been low for the past three years and housing prices have been rising, convincing borrowers that they have made good deals. They’re certain that if necessary, they can sell their property, pay off the mortgage and walk off with a profit.

Ran Golan of Rehovot, married with three children, is resigned to the burden of a mortgage. He just purchased a new apartment, and will soon start paying back NIS 4,500 a month for 25 years.

“That’s how it works today. You make a commitment to your wife, followed soon after by a commitment to your bank,” he says. “This is my second mortgage. I bought my first four-room apartment in 2004 with a NIS 480,000 mortgage. I sold it after six years and paid the bank back exactly NIS 480,000, even after making all those monthly payments.

“Like everyone else, I joined the social-justice protests last year, but now I have no choice but to buy an apartment. The first place was in a central location, but we now want to move to a new project in a younger neighborhood. Prices have decreased only slightly; I bought an apartment for NIS 1.5 million that was listed for NIS 1.7 million last year. I realize my monthly payments will increase in three years, but my salary should go up as well. My experience is that payments go up only by a few hundred shekels a month over the years,” Golan says.

Nevertheless, what now seems like a solid investment could turn into a financial stranglehold. Iris, Shifra, Racheli and Dana, four friends in their 40s and 50s, work for a pharmaceutical company. During their lunch break, they talk about how tough it is to pay their mortgages, which equal as much as 80% of their apartments’ value. “We’re fortunate to have stable jobs, but we’ll be making mortgage payments until we retire. They eat up a big portion of our monthly income, and we can’t wait to be done with them,” says Shifra.

How does this impact you?

“It means we can’t save anything at all and we live from paycheck to paycheck. We’ll be able to save money for our children only when the payments are finished.”

So how will your children be able to afford an apartment?

“We ask ourselves this all the time.”

When you retire, will you sell the home and travel the world?

“No, we’ll refinance and use the money to move into an assisted living facility. We see what’s happening to our parents now.”

It is hard to find Israelis like Eran from Binyamina, who is not even considering buying an apartment given both the large downpayment he would need and because “I simply don’t want to buy an apartment at these prices. Something about them makes you say, this is not right.”

The goal: One good apartment

Dana Yoachim tends to agree. Yoachim lives with her husband and daughter in a three-room apartment in Petah Tikva. “We just moved in and I already feel cramped. We need a bigger place,” she says.

Could you afford it if you have more children?

“Probably not. We both earn a lot, working as dentists. I’d prefer a five-room apartment in the Sharon or Dan area, but this would cost anywhere from NIS 1.8 million to NIS 2.1 million. That means taking a NIS 1 million mortgage before even talking about the interior design or furnishings. I’ve already considered moving beyond the Green Line ‏[the pre-1967 border‏] because prices are so high here,” Yoachim says.

Why not start with something smaller and upgrade later?

“I’d like to buy one good apartment that I really like and not have to move every few years.”

Did your parents help in buying the apartment?

Yoachim’s sister Tali Stern replies: “No. My father had his own business, and they raised five children well. They bought an apartment for their son, but not for their daughters. They’re part of a different generation. They could own a much nicer house, but prefer their smaller place in the center of town. I’m trying to convince them to move out.”

Yoachim’s words illustrate another aspect of public attitudes toward housing. People are not willing to compromise on their standard of living even when prices soar. They expect much more than their parents did. This is borne out by Bank of Israel statistics showing an increasing number of upscale apartments being purchased. The number of loans for apartments worth more than NIS 2 million rose by 23% last year.

Benny Mazgini, head of a nonprofit organization for mortgage casualties, has a lot of experience working with people who defaulted. However, defaulting is not the main problem nowadays, he says. “I can tell you that more people are applying for mortgages because more people are seeking our advice before taking out loans. Numerous young couples have taken out mortgages after consulting with us.”

Borrowers are not in distress right now, he says. “It’s not like it was 2002, when many people working in high-tech took out large mortgages that they later couldn’t handle. Nowadays banks reach settlements with defaulters, and few middle-class borrowers come to us for advice.”

Mazgini directs his criticism at people who demand lifestyles they can’t afford. “I don’t understand some of the couples who approach us for help. Even with the rising cost of living, I fail to see how their mortgage is the problem when I see their lifestyle. I get people in senior positions, making NIS 20,000 to NIS 25,000 a month, who still have trouble making mortgage payments. Their problem is their priorities. They have two cars, iPads and iPhones, plasma TVs, and pay NIS 4,000 a month for their cell phones. They go on NIS 20,000 vacations. They pay for it all in installments. People work and earn well, but waste their money and don’t save,” he says.

All of these factors mean that a small change in the current financial atmosphere, such as an increase in interest rates or the inflation rate, or an economic slowdown that includes layoffs, could bring about a wave of defaults on these mortgages that subsidized the meteoric rise in real estate prices.