Since the aftermath of the 2008 Global Financial Crisis, the Israeli property market has been on the rise. The combination of low-interest rates and a thriving economy resulted in a tremendous expansion in the property market. In addition, the complexity of getting approvals for new developments further exacerbated shortages on supply side of new housing projects, which created an environment that drove prices higher year over year. Not surprisingly, as real estate continued to appreciate by leaps and bounds, incomes rose at a far slower pace.
It was “acceptable” in an economy with exceptionally low inflation. However, with the cost of living rising, the Bank of Israel’s (BOI) had to step in earlier this year and raise interest rates in order to bring inflation under control. Within few months, it rose from a historically low level of 0.1% to 2.75%. The jump in the cost of borrowing of finance could no longer be ignored by both builders and consumers.
BOI interest rate, Source: tradingeconomics.com
In fact, as reported by Bizportal, the worrying sings of a cooling property market are already here. According to the BOI statistics, there were 7,886 mortgages taken out last month, whereas there were 7,800 mortgages approved during the same period in 2021. However, what is not taken into consideration is that this year there were 40% more working days this September (due to the Jewish holidays). If compared on a like to like basis, the stats for this month should have produced 10,920 mortgages. As such, this demonstrates a significant shortfall and essentially serves as a precursor of real estate slowdown. If you add to it a fall of 41% in a number of apartments sold in August, it will certainly make you ponder if property market is entering a period of stagnation or even a decline.
Housing Index, Source: tradingeconomics.com
Whilst consumers took out 7.7 billion shekels in September, when compared to prior months, the overall value of mortgages fluctuated between 10 and 13 billion shekels. An astonishing decline of 30%, primarily due to an increase in interest rates, cannot be overlooked. Having said that, suppliers show no evidence of lowering asking rates for properties currently on the market.
However, there are a few more factors that must be considered. First, a rising proportion of monthly mortgage payments in relation to overall household income. Currently, almost half of borrowers spend up to 40% of their monthly income on their mortgages. To put things in context, only 30% of household income was spent on it in 2015.
Second, due to the explosive growth of the property sector and trailing salaries, a larger portion of the mortgage in relation to the house worth is required. As a result, there is a higher risk leverage, and any increase in interest rates is felt much more severely by the household. Presently, almost 46% of all mortgages that have been taken out are for 60% of the property’s worth. This is unusually high for the traditionally very rigorous Israeli market in this area. In comparison, these sorts of mortgages accounted for 30% of all mortgages issued in 2016.
In a less controlled market, however, there is little that can be done to impact property prices. However, a significant factor in the equation in Israel is an artificially low supply of new housing projects due to red tape. It will be up to this week’s elections and the creation of a government with a functioning legislative majority to rectify this.
Otherwise, two more interest rate hikes (as the BOI has already stated it intends to do) will undoubtedly impede people’s capacity to cope with rising costs while also paying their mortgages. And, if current trend continues, the real estate market will be unable to ignore the drop in demand, forcing prices to move in a direction that no property developer wants to see.