The day after the Bank of Israel announced tougher regulations on mortgage costs in a move to deflate the housing bubble, foreign banks believe that Governor of the Bank of Israel Prof. Stanley Fischer is signaling that he will not raise the interest rate significantly in the near term. The analysts believe that Fischer's current measures will help cool the real estate bubble, and predict a slow but steady creep in the interest rate next year.
Goldman Sachs, which had predicted that Fischer would not raise the interest rate and would opt for macro-prudential measures instead, believes that the Bank of Israel "is likely to stay on hold for a couple of months, as the Fed loosens US monetary conditions even further." It predicts that Israel's interest rate will reach 3.5% by the end of 2011, as the economic recovery is now well entrenched.
"What is particularly significant however is the bank's decision to introduce additional macro prudential measures to stem speculative pressures building up in the local real estate markets. This shows the Bank of Israel's continuing concern with rapidly rising domestic asset prices and underlines its determination to continue to "normalize" monetary policy," says Goldman Sachs.
Merrill Lynch analyst Jean-Michel Saliba says, "To the extent that housing inflation has been the main driver of inflation on the back of historically low levels of interest rate and a still sluggish supply response at this stage, these measures should help gradually dampen bank lending incentives, and reduce (but not eliminate) the need for rate hikes."
Merrill Lynch sees the interest rate at 2.25% by year-end and at 3% at the end of 2011.
Credit Suisse analyst Ivailo Vesselinov says, "We expect that the latest measures to reduce the availability of mortgage financing will have a meaningful impact on housing prices in the medium term." He predicts further monetary tightening in the coming months as the prudential measures are complementary to, rather than a substitute for, additional rate hikes. He predicts that the Bank of Israel will raise the interest rate from the current 2% to 2.25% by the end of 2010 and to 3% by the end of 2011.
Financial markets believe that the US Federal Reserve will announce further monetary expansion, amounting to hundreds of billions of dollars, at its upcoming meeting in November.
JPMorgan Chase analyst Miroslav Plojhar says that the mortgage measures are not "a true substitute for higher interest rates," although they will likely cool down the rise in house prices. He predicts one more interest rate hike this year and an interest rate of 3.5% at the end of 2011.
UBS analyst Darren Shaw believes that the tightening of mortgage terms will cause the banks to underperform in the near term, especially Mizrahi Tefahot Bank (TASE:MZTF), which has the largest share of the mortgage market, at 35%. However, it will do little to affect housing prices.
"In our view rising house prices in Israel are a product of low interest rates, low availability of land for development as well as red tape in regional permit committees. We therefore believe that although this maneuver may somewhat hinder some private real estate investment, the issue of under-supply persists and with no remedy in the medium term, excess demand will prevail. We believe that Israel’s supportive GDP growth and relatively low unemployment rate will continue to feed the demand in the housing market."
Shaw concludes, "Although we believe that rising mortgage costs could slowdown loan growth, we believe that the biggest risks to the housing market are a return to normalized interest rates and a dramatic increase in supply, both of which we do not expect to occur in 2011. Although we may see a slight negative impact on net interest margins - if the banks try to grow market share - we would expect this to be more than offset by the impact of rate rises."
Published by Globes [online], Israel business news - www.globes-online.com - on October 26, 2010
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