Home prices in Israel are about 25 percent higher than their historical averages, and further measures may be needed to prevent a housing bust, according to the International Monetary Fund.
A combination of low mortgage rates and land shortages has fueled rising home prices in Israel. Prices have skyrocketed, increasing 80 percent in nominal terms since 2007, the IMF said.
The Bank of Israel may need to tighten its lending rules if property prices continue to rise, the organization said.
"The Bank of Israel should respond nimbly to changes in the economic environment," the IMF said in their annual report. "A further tightening of macroprudential measures may be needed to alleviate risks of a boom-bust cycle in the housing market."
The report also suggested the government should consider increasing property purchase tax for non-primary residences.
Since the global crisis of 2007, the Bank of Israel has mostly kept interest rates low as a way to boost the economy.
With the large price increases in the last six years, the IMF warns that a rapid price correction could lead to a recession in Israel. A slower price decrease would allow the country's economy to continue growing.
Another way to cool the housing market is by alleviating the supply constraints, the report states.