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Mortgage lending continues to fall as housing costs, interest rates rise

Bank of Israel notes decline of over 30% in home loan borrowing over past three months as prices appear to constrain borrowing

An illustrative view of a Bank Hapoalim branch in central Jerusalem on July 27, 2022. (Yonatan Sindel/Flash90)
An illustrative view of a Bank Hapoalim branch in central Jerusalem on July 27, 2022. (Yonatan Sindel/Flash90)

Mortgage borrowing in Israel has continued to decline amid rising interest rates and soaring housing costs, according to figures released this week by the Bank of Israel.

The overall value of loans in October 2022 fell to NIS 6.09 billion ($1.77 billion), compared to NIS 7.7 billion ($2.24 billion) in September and NIS 9.63 billion ($2.81 billion) in August. This is the lowest monthly total since June 2020, and marks a decline of 31% in the value of mortgages over the last 3 months (August to October) compared to the previous period (from May to July), according to the central bank.

Overall housing market data suggests that this is the result of fewer new mortgages rather than a decrease in the value of individual loans, with a particularly dramatic fall off in the numbers of new homes sold (down 24% in July to September compared to the previous three months).

With average home prices rising – an average apartment now costs around NIS 1.9 million or just under NIS 3 million in Tel Aviv – and wages growing by a much lower 4% year on year, the value of mortgage borrowing might logically be expected to go up.

Interest rates for home borrowing have meanwhile risen steadily since the start of the year. In January, a fixed-rate mortgage for more than five years was available for 3.1%. In October the same kind of loan had risen to 4.71%. Today, fixed-rate home loans for a 30-year term have rates of between 5.6 and 6.0%.

Assuming mortgage borrowing of over 60% of the value of the property (most mortgages are for between 60% and 75% of the cost of a home), in January a variable rate loan was available for 1.53%. In October, this had risen to 4.2%.

Israeli business daily The Marker estimated recently that the average home loan is now costing Israeli households NIS 1,000 ($291) per month more, as a result of the interest rate rises.

Those watching the market such as Norman Shapiro, senior mortgage broker at First Israel, believe that there is still room for interest rates to go a little higher, but that further increases will be more limited. He’s advised clients taking on a mortgage of 20-30 years to opt for a fixed rate, so long as they can meet the monthly payments.

Shapiro said he wants his clients to “sleep well without worrying about the possibility of rates skyrocketing.”

If the plan is to pay a portion of the mortgage earlier — within three to five years — he believes it may make sense to take that part of the mortgage at a variable rate.

Aaron Krasner, head of Anglo Mortgages, said he advises people to “move fast.”

“A bank is only bound to honor an offer which it makes for a period of 21 days. The Bank of Israel has been very clear that it expects to continue to increase interest rates for a number of months to come, meaning that the mortgage offer available today may well not be there in a month’s time,” he told The Times of Israel.

The Central Bureau for Statistics’ figures for October suggested house prices for the last year across Israel have risen by 19.8%, compared to a 5.1% increase in the overall cost of living (the Consumer Price Index), and a 4% increase in salaries.

Setting aside concerns about the sustainability of the exorbitant prices in Tel Aviv, no one — including most significantly the Bank of Israel — expects house prices to fall dramatically.

A view of Tel Aviv on September 8, 2022. (Yossi Aloni/Flash90)

Mortgage affordability is based on monthly household income, and mortgage payments cannot exceed more than a third of that income. Steeper prices are raising the barrier to entry to the housing market, even through government-subsidized schemes such as the Mehir Matara (Target Price) lotteries, which are still based on market prices.

Given the block on borrowing more than 75% of the value of a home, as determined by a professional appraiser, higher house prices and mortgages can often mean drawing on the bank of mom and dad to help with deposits. Globes has reported that the Bank of Israel wants to clarify rules around what’s known as “reverse mortgages,” a mechanism by which older people can release equity in their property to help their kids acquire homes.

Rising borrowing costs also affect builders and developers, who have frequently taken loans to fund land purchases and construction projects, paying them back as they sell completed apartments at a profit. But higher loan costs make property owners more determined to sell at a high margin, and more reluctant to speed up projects and to lay out funds which they may struggle to get back in a more challenging market.

The construction index (which allows for some price rises to reflect inflation in the costs of building materials, had been rising inexorably month on month. In September, the increases stopped. This has also contributed to a construction slowdown.

View of a construction site in Ashkelon, July 19, 2022. (Nati Shohat/Flash90)

Raul Sarugo, head of the Israel Builders’ Association, said in an interview with Channel 12 recently that the “decision to sharply raise the interest rate again is a dangerous sign.”

“The distorted perception that higher interest rates will take care of the housing crisis is a bitter mistake,” he said, arguing that it will negatively affect construction financing.

The outgoing government coalition believed that the key to managing housing prices was to build and build. If Sarugo is right, the private market will not deliver the homes needed to hold back continuing house price inflation.

The Bank of Israel has expressed its confidence in the Israeli economy as a whole. In an interview with Reuters last month, Bank of Israel Governor Amir Yaron said he believes that overall price pressures are easing and he sees inflation coming back under range next year.

Asked specifically about mortgage rates, Yaron said that while “front-loading” interest rate rises is “painful” for those with mortgages and other loans, he believes that “it will actually help avoid the need for higher interest rates” in the future.

The bank has said that a new government will need to promote the reforms necessary to maintain Israel’s economic strength — high employment, low inflation, and consistent pressure to alleviate rising costs of living.

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