"The average payment to income ratio in new mortgages remained at high levels, and this data - combined with the high weight of variable rate mortgages within the balance of housing credit - increases the sensitivity of the borrowers’ repayment ability to an increase in the interest rate and a slowdown in economic activity, and particularly an increase in unemployment, warns the Bank of Israel in its Monetary Report for the first half of 2013, published today.
"During the reviewed half year, the increase in credit to households continued, though at a more moderate rate than in previous years. The growth in credit to households derived almost completely from housing credit. It is worth nothing that despite the fact that there was relatively rapid growth in credit to households in recent years, the debt of this sector in relation to GDP is noticeably lower than in other countries, particularly when compared to countries that experienced a crisis in the housing market," adds the Bank of Israel, but cautions, "While the macroprudential steps taken by the Supervisor of Banks in the housing credit market contributed to a certain reduction of the risks implicit in new mortgages, which was reflected in a decline in the Loan to Value (LTV) ratio, the pace of growth of the housing credit balance remained high."
As for the interest rate, the Bank of Israel noted that while lowering the interest rate would raise housing demand, raising the interest rate would hurt the economy. The Monetary Committee concluded, "A higher interest rate, while worldwide interest rates are at low points, would have strengthened the pressure for appreciation of the shekel and had a negative impact on exports, private consumption and investments. It would have thereby acted to moderate activity in the economy and increase the unemployment rate."
It adds, "The rapid increase in home prices was to a large extent affected by the lack of supply of homes, the Monetary Committee emphasized that the expansion of the supply of homes, through an increase in the amount of land available for construction and speeding up the planning processes, is the major step necessary in order to support a slowdown in the pace of price increases."
The Bank of Israel estimates that the austerity measures in the budget will reduce economic growth by 0.7% in 2014, compared with estimates made before the budget was approved. "This is mainly due to the increase in taxes and the reduction in child allowance benefits, since these are expected to negatively impact demand via private consumption and, to a lesser extent, via investments. Despite this price, the deficit reduction plan was necessary, since without it, the deficit would have been expected to reach almost 6% of GDP in 2014. This would have threatened the financial stability of the economy, led to an increase in the cost of government debt, and had a prolonged negative impact on the level of activity in the economy."
Published by Globes [online], Israel business news - www.globes-online.com - on July 31, 2013
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