The Bank of Israel's Supervisor of Banks David Zaken today published a draft directive limiting the loan-to-value (LTV) ratio in housing loans. The new restrictions will apply to loans approved from November 1. The limitations on loan-to-value differentiate between mortgages to investors, those upgrading their home, and first-time homebuyers.
The directive prohibits banks from approving mortgages with an LTV of more than 70%. An exception will be made for first-time buyers who will be allowed up to 75% of the value of the apartment. The directive establishes even stricter conditions for mortgage takers buying an apartment for investment, limiting the LTV to 50%. Homes for investment include second apartments and apartment bought by non-residents. The Bank of Israel said that the directive will go into effect after discussion in the Advisory Committee on Banking Matters.
The Bank of Israel commented, "In recent years, we have seen negative developments in the housing market and the housing credit market. The draft directive has been published against the background of the marked increase in recent years in the balance of housing credit and the increase in home prices in Israel. Recent trends in the housing market indicate an increased number of transactions, an increase in the monthly level of mortgages granted and an increase in investors' volume of activity, among other things against the background of the low interest rate environment in mortgages."
The Bank of Israel continued, "These developments impact on the risk level inherent in the banks' credit portfolio - the accelerated increase in the housing credit portfolio on banks' balance sheets is liable to include risks to the stability of the banking system, primarily in light of the correlation between the housing credit portfolio and the construction and real estate credit portfolio. These represent, as of June 30, 2012, about 40 percent of total balance sheet credit risk.
The Bank of Israel notes that many financial crises which took place in various countries began with the granting of housing credit at terms that did not reflect the risks developing in that market. The new directive, the Bank of Israel says, is intended to reduce the significant effects of the realization of a crisis in the real estate market, by reducing the risk inherent in the housing credit portfolio and reducing the risk inherent in taking out a housing loan with a high loan-to-value ratio.
Published by Globes [online], Israel business news - www.globes-online.com - on October 29, 2012
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