With the exception of this past year in which prices have softened somewhat, Israel real estate prices over the past decade have risen significantly. Understandably, the Bank of Israel (Israel’s version of the US Federal Reserve) wants to prevent pricing from escalating to the point of creating a housing bubble with all its attendant risks.
As a result, a few weeks ago the Bank of Israel changed a number of housing lending requirements in order to help keep real estate pricing in check.
First, the Bank of Israel placed mortgage restrictions on real estate investors who already own a home and are buying second and third homes as investments. Statistics indicate that this segment of buyers is driving up market prices. Therefore, the Bank of Israel has limited the mortgages that investors can obtain to a maximum of 50% of the apartment’s value. For example, if an apartment is sold for 2,000,000 NIS (or a little over $500,000) the largest mortgage that an investor can receive is 1,000,000 NIS (or shekels), thus requiring the buyer to put down 1,000,000 NIS. This larger equity requirement should reduce the amount of units that will be purchased by investors and consequently help keep prices down.
Second, one of the Bank of Israel’s goals is to help first time buyers purchase apartments. The Bank of Israel addressed these buyers’ needs by lowering interest rates by .25%, bringing rates down to 2%. These lower interest rates will give first time buyers more financial flexibility, allowing them to afford larger mortgages for their home purchases.
Third, the Bank of Israel has placed mortgage limitations on home buyers, limiting them from borrowing more than 70% for a home. First time buyers, however, can borrow up to 75% of the property’s value.
This program sounds clever, as the Bank of Israel is placing restrictions on speculators, ensuring that first time home buyers not get priced out of the market. But the Bank of Israel’s restrictive measures don’t address the underlying reasons for the past decade’s considerable price increases.
One major cause for the rising prices is that there are not enough apartments being developed to handle the strong housing demand. This shortage can be traced to the Israel Land Authority’s (or Minhal’s) historically slow pace of selling government land for development.
Thankfully, in response to the August 2011 “tent city demonstrations” in which thousands of Israelis rallied against the high cost of living and the lack of affordable housing, the Israeli government approved the Trachtenberg Committee’s housing recommendations, including requiring Minhal to sell enough land over the next five years to construct 187,000 apartments.
With the implementation of the Bank of Israel’s new lending requirements and the Trachtenberg laws, along with other newly created programs, we are finally witnessing a concerted government effort to tackle the housing issue. If the government can develop and implement a system to fast-track the process of releasing state land for development – including expeditiously selling the land and promptly providing building permits – then they will be able to achieve pricing stability.