"Globes" has obtained preliminary figures indicating that an all-time high of almost NIS 6 billion in new mortgages were granted during August 2012, 65% above the monthly average for the preceding year, and 20% more than the NIS 4.9 billion in new mortgages granted in July.
"Most of the increase occurred in the last week of August, during which there was a rush by customers seeking mortgages," said a top banker.
There were several factors driving the rush to close purchases apartments in August, one of the most important of which was the 1 percent VAT hike, which came into effect on September 1. Additional factors included the interest rate cuts by the Bank of Israel in the past few months, and assessments that the current rate of 2.25% will remain in place through the end of the year, and investors switching to real estate in view of the weak capital market.
The mortgage market has actually slowed so far this year, with an average of NIS 3 billion in new mortgages per month. That said, there has been a steady increase in new mortgages since May.
The Bank of Israel began cutting the interest rate in late 2011, bringing it down from 3.25% to 2.25% for July. The Bank of Israel believed that measures taken last year to restrict mortgages meant that the lower interest rate will not refuel the mortgage market and home prices. However, data showing a steady rise in the real estate market is forcing the Bank of Israel to rethink its position and consider how to cool down the market. One measure is to cap the loan-to-value (LTV) of new mortgage at 60%. While there is no question that such a measure would cool down the market, it would also have severe consequences.
The Banking Supervision Department has been discussing such a measure for two years, and always shied away from implementing it. Besides the gross intervention in the free market, capping the LTV is controversial because of its heavy social cost. The Bank of Israel's biggest concern about such an aggressive measure is that it will drive out of the market potential homebuyers who lack the equity to finance 40% of the price of a home, which would have a direct impact on the homebuyers with the least means - young couples and families in the periphery.
Bank of Israel data show that high LTV mortgages are mostly for homes costing less than NIS 800,000: 60.5% of homebuyers in this category took out mortgages with LTV's higher than 60%. In contrast, there is an inverse correlation between the LTV and the value of a home. 37% of buyers of homes valued at NIS 1-1.2 million took out a mortgage with an LTV higher than 60%, and 26.5% of buyers of homes valued at over NIS 2 million took out a mortgage with an LTV higher than 60%.
Presumably, Governor of the Bank of Israel Prof. Stanley Fischer is in no hurry to impose such an extreme measure, and he may prefer to wait for the September mortgage figures on the assumption that the August data spiked because of the pending VAT hike. But if the trend of the past few months continues, he may have no choice but to intervene in the housing market.
Published by Globes [online], Israel business news - www.globes-online.com - on September 2, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012