"The Bank of Israel's new restrictions are good for the stability of the banks, and in that more stable customers will probably constitute the future demand for apartments, but we doubt whether these measures will be able to rein in the rise in home prices. So long as the government does not strongly intervene in the industry, we see no chance for change," says Epsilon Investment House Ltd. in a review published today.
The review was written less than a week after the Bank of Israel imposed new mortgage restrictions and unexpectedly cut the interest rate by 25 basis points to 2%. Epsilon says, "In the short term, thousing will present the Governor with a major dilemma, mainly because of the drop in housing starts."
Epsilon says that if home price continue to climb, this will shorten the duration of investment portfolios, on the assumption that the Bank of Israel is liable to zigzag its monetary policy. In this scenario, Epsilon advises shortening the duration of investment in shekel bonds to 3.5 years.
A second option, if foreign macroeconomic data continue to be better than expected, is to divert the portfolio to foreign stocks, says Epsilon.
As for the shekel's weakness against the basket of currencies in the past few days, Epsilon says that this is a "natural development after the shekel's sharp appreciation in the past two months."
"The interest rate cut is liable to undermine the value of the shekel, which has been stable lately, and reduce foreign investment," says Epsilon. Under these circumstances, it advises equalizing the bond portfolio between unlinked and CPI-linked bonds.
"The Bank of Israel took us by surprise, and in view of the reasons we cite above, it is possible that the last word has not yet been said," says Epsilon. "The interest rate cut provides a tail wind for a further reduction in yields in the domestic market, and will probably encourage the continuation of positive developments in the Israeli economy."
Published by Globes [online], Israel business news - www.globes-online.com - on November 4, 2012
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