The Bank of Israel directive on mortgages yesterday is a correct, important, enlightened and immediate step. Many fine words can be written about it but there is just one problem - it is a painkiller for a dying patient. Making the interest on mortgages more expensive except for small loans is not the treatment that the real estate market needs.
"It's no great drama," the banks told us this morning. Rightly so. Competition between banks is intense and the new directives will only raise mortgage interest rates by 0.5-1%. And don't be surprised to see the banks that want to increase their market share in mortgages being prepared to absorb some of the costs. If that happens the new Bank of Israel measures will hardly be felt.
What is Supervisor of Banks Rony Hizkiyahu doing? The Bank of Israel is trying to work on public opinion and generate a certain psychological momentum. Hizkiyahu is indicating to the market that additional measures are on the way. He is saying, I can do much more and I will do it if I need to.
If the public do believe him and the giant headlines in today's papers will assist Hizkiyahu, then people wanting to buy an apartment will wait because they think that prices will stop rising and even go down.
Demand will be reduced and people wanting to sell will try and sell now because they believe that the value of their property will go down - supply will rise. Hezkiyahu thinks that the gap between demand and supply is just thousands of apartments and if enough buyers are pushed out of the market, the gap will close and the rise in prices will be halted. He is right but this is not the solution to the problem.
Dealing with the problem on the demand side alone is a limited handling of the problem. Only measures like increasing supply of land for construction or providing incentives (or fines) to contractors that begin building on land that they own will bring an additional inventory of apartments onto the market. In the end we are talk about a real rather than a financial problem.
More people want to buy homes, mainly to live in them, than there are homes on the market. As Psagot's Vered Dar wisely says, "Over the past decade they simply haven't built enough apartments in the country."
Hizkiyahu understands that too and he is buying time for the government until Minister of Finance Yuval Steinitz, the man who invented the two-year budget, and Minister of Housing and Construction Ariel Atias will see sense, stop talking nonsense and take some concrete steps.
Published by Globes, Israel business news - www.globes-online.com - on October 26, 2010
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