Fischer warns on US-style mortgage crisis

The Bank of Israel Governor said, "It's enough for 0.5% of borrowers to become insolvent and banks will lose money."

"Most financial crises in the world began in the housing market. This has to be understood. Ireland, Spain, the US - everything began in real estate. We mustn’t allow a bubble here that will burst, because if that happens, we'll really have a problem, a problem we've avoided in the past three years," Governor of the Bank of Israel Prof. Stanley Fischer warned the Knesset Finance Committee today.

Fischer added, "The essential solution to Israel's housing problem is to increase supply. The Bank of Israel can only deal with demand. The only thing that we're doing on the supply side is to finance contractors, but we can affect only influence demand.

"What has happened to home prices since 2008 is a surge beyond the trend line. We're worried by what will happen if prices continue to climb at this rate. There are only two countries in the world where home prices have risen more than in Israel - Hong Kong and Singapore."

As for the interest rate, Fischer said, "The interest rate is rising. It's clear to everyone that more changes await us in the future. Today, the one-year linked interest rate is 2.35%, and the historic rate was 4%. We don’t know if it will stay at this level, but linked interest rates will probably rise… This increases risk for individuals and households. We must preserve customers' stability; that's part of our job."

As for competition over mortgages, Fischer said, "At least in this sector, the banks are competing - and how. On average, households pay 0.6% above the Bank of Israel interest rate, i.e. 3.6% rather than 4.5%. This means that the public is paying less than the prime rate and the banks are in a fairly problematic position. They are making almost no profits on mortgages. That's real competition.

"The situation is very fragile. It's enough for 0.5% of borrowers to become insolvent and banks will begin to lose money. The rollover here is problematic. We don’t want the banks to take too risks that are too big. That will harm them, damage the financial system and cause us, the entire economy, including the budget, great problems. This is what we mean when we mention countries like Spain, the UK, the US, and Ireland. We must prevent that."

Published by Globes [online], Israel business news - - on May 3, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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