A financial stability report for the first half of 2017 published today by the Bank of Israel shows that over half of total credit in Israel is for housing. "The proportion of credit granted for housing and the construction and real estate industry rose from 37% in 2008 to 52% in 2016, although the rate of increase has fallen substantially over the past year," the report states.
The Bank of Israel believes that the Israeli economic system is stable, but that the biggest risk to the economy comes from financial exposure to the real estate market. "The exposure of the financial system to the housing market still constitutes the major substantial risk. At the same time, activity and the rise in prices have abated somewhat in recent months. If this continues, it will reduce the risk," the Bank of Israel states.
The Bank of Israel adds that both financial institutions and households are exposed to the risk of an excessively steep fall in housing prices. It should be noted that a sharp fall in housing prices will affect the value of the collateral at the banks' disposal. If a household has difficulty in making the regular payments to the banks, selling the property purchased will not cover the outstanding loan balance. Even if the debt is covered, the bank gets its money, but the householder is not left with enough resources to buy another apartment - even a cheaper one.
"A systematic assessment of the risks to the economy shows that financial institutions and households are still exposed to the risk of a sharp drop in housing prices," the Bank of Israel report states. Households are not as sensitive to a minor interest rate hike as they are to a change in the unemployment rate. For example, if a household's expenses rise by NIS 300 due an increase in the interest rate, the household will not collapse, but if one person in the household loses his or her job, the household is certainly at risk of collapse.
Published by Globes [online], Israel Business News - www.globes-online.com - on June 27, 2017
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