The Bank of Israel has warned on the effect of a sharp fall in home prices on the Israeli economy. In its semi-annual report on the stability of the domestic financial system, the Bank of Israel notes that the domestic financial system maintained stability in the second half of 2016.
The Bank of Israel observed that home prices in Israel are still rising, "Home prices in Israel continue to increase, and in the 12 months ending in November 2016, they increased by 8.1%. It is common to assess pricing in the housing market by examining prices in relation to fundamental factors, particularly rent and wages or income. Compared to the past, these two indices are at peak highs."
However, the Bank of Israel warns, "Since the interest rate environment has been low for a prolonged period - a policy that is necessary in view of macroeconomic developments - and since it is having a prolonged effect on asset prices, the public and financial institutions are exposed to the risk of sharp declines in home and financial asset prices."
"Such declines may take place if major economies move into further recession or if their financial stability weakens, and may infect the Israeli economy through a negative impact on exports and financial asset prices. They may also take place if Israel’s geopolitical situation worsens and leads to an increase in the economy’s risk premium, or if shocks lead to a significant decline in households’ disposable income."
The Bank of Israel adds, "The risk of sharp declines in home prices is derived from the fact that the banks are characteristically highly exposed to mortgages and credit to the construction and real estate industry, as well as to consumer credit that is correlated with these other types of credit. A sharp decline in asset prices may lead to reduced economic activity and reduced consumption, a process that may have a negative impact on the entire Israeli economy. Such an impact may make it difficult for mortgage borrowers to meet their repayments or to sell assets in order to overcome the repayment difficulty."
Published by Globes [online], Israel business news - www.globes-online.com - on January 25, 2017
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