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Bank of Israel Clamps Down on Mortgage Terms to Avoid Real Estate Bubble

Bank of Israel Clamps Down on Mortgage Terms to Avoid Real Estate Bubble

Like numerous other countries fearing a residential real estate bubble through easy mortgage terms, the Bank of Israel is capping the loan-to-value term of mortgages at 33 percent to 40 percent.  The bank is also increasing lenders' provision for mortgages.

Globes, an online real estate financial newspaper published in Rishon LeZion, the fourth largest city in Israel reports the Bank of Israel is set to launch a second round of macro-prudent measures in real estate. The action aims to prevent the creation of a real estate bubble through mortgages caused by the new expansionist monetary policy in Israel.

Last week, the Bank of Israel cut the interest rate for July by 25 basis points to 2.25%.

Globes reports the Bank of Israel is planning two measures. The first is to directly cap the loan-to-value (LTV) of mortgages to 33-40%. The second is to increase the banks' provisions for mortgages hoping to reduce their incentives to grant new mortgages.

Lower interest rates make it more worthwhile to invest in real estate, and less worthwhile to invest in financial assets.

Globes reports Israel's monetary council members were "deeply perturbed by mortgage data that the Bank of Israel had published ahead of the meeting, and put the issue on the agenda."

The Bank of Israel stated that new mortgages rose 35% to NIS 4.1 billion ($1 billion U.S.) in May from NIS 3.02 billion in April.

New mortgages peaked at NIS 4.8 billion in May 2011. Mortgages by investors were 30% higher in May than in April, reaching a new peak so far this year.

In addition, 40% of new mortgages - NIS 1.7 billion - were made at LTVs above 60%, and the proportion of these mortgages rose sharply.

(1 ILS (Israeli shekel, NIS) = $0.254940 U.S.)

Globes reports that In an effort to ease fears, sources at the Bank of Israel said the May mortgage figures were for only one month. However, an examination of the data shows a clear trend, and the monetary council members rejected the soothing words.

The newspaper reports top Bank of Israel officials have warned Bank Governor Stanley Fischer that, in view of the pending monetary expansion, the current macro-prudential policies (such as capping the variable interest component of new mortgages to one-third of the total) were insufficient.

The monetary council members held off taking operative measures for now, anticipating that new mortgages restrictions within months are coming.  The interest rate is clearly heading down.

Globes reports that at the recent the Caesarea Forum, Fischer hinted it could shut the banks' credit tap.

Fishcer told the Forum, "Real estate companies are also complaining (about the credit crunch), where problems are growing.

"Every financial crisis begins in real estate. We're building at a high rate. If the supply increases, logically prices should come down. But if we increase the credit too much, contractors won't lower prices. If we give too much in this area, we'll delay the fall in prices."

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