Bank of Israel to tighten mortgage terms further
Loan-to-value will be capped at 33-40%, and the banks' provisions for mortgages will rise.
The Bank of Israel is planning two measures. The first is to directly cap the loan-to-value (LTV) of mortgages to 33-40%. The second is to increase the banks' provisions for mortgages, to reduce their incentives to grant new mortgages.
The sources added that the monetary council discussed these measures at last Monday's meeting, where it decided to again cut the interest rate, due to growing worries about a new prolonged global recession, and even a financial crisis.
Lower interest rates make it more worthwhile to invest in real estate, and less worthwhile to invest in financial assets. Monetary council members were deeply perturbed by mortgage data that the Bank of Israel had published ahead of the meeting, and put the issue on the agenda.
The Bank of Israel stated that new mortgages rose 35% to NIS 4.1 billion in May from NIS 3.02 billion in April. New mortgages peaked at NIS 4.8 billion in May 2011. Mortgages by investors were 30% higher in May than in April, reaching a new peak so far this year. In addition, 40% of new mortgages - NIS 1.7 billion - were made at LTVs above 60%, and the proportion of these mortgages rose sharply.
In an effort to ease fears, sources at the Bank of Israel said that the May mortgage figures were for only one month. However, an examination of the data shows a clear trend, and the monetary council members rejected the soothing words. The sources said top Bank of Israel officials have warned Governor Stanley Fischer that, in view of the pending monetary expansion, the current macro-prudential policies (such as capping the variable interest component of new mortgages to one-third of the total) were insufficient.
The monetary council members held off taking operative measures for now, but conventional wisdom at the Bank of Israel holds that new mortgages restrictions within months are a given, especially since the interest rate is clearly heading down.
At the Caesarea Forum last week, Fischer hinted about the Bank of Israel's worries, reiterating that it would shut the banks' credit tap. "Real estate companies are also complaining (about the credit crunch), where problems are growing. Every financial crisis begins in real estate. We're building at a high rate. If the supply increases, logically prices should come down. But if we increase the credit too much, contractors won't lower prices. If we give too much in this area, we'll delay the fall in prices."
Published by Globes [online], Israel business news - www.globes-online.com - on July 1, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012
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