The Bank of Israel has released mortgage market data for 2022. During the year, NIS 117.6 billion shekels were borrowed, according to the report. This is the most mortgages ever issued in Israel, and it is NIS 1.5 billion shekels more than the previous year’s total.

The big picture, however, obscures the specifics and is therefore misleading.

The last year can be divided roughly into two halves. Mortgage volume increased by 33% from January to July compared to the same period in 2021. However, things took a dramatic turn for the worse in the latter half of 2022, with mortgage applications falling by 25%. This downward trend has accelerated, with mortgages falling by around 40% in the fourth quarter of 2022 compared to the same period the previous year.

In December, non-investment apartment buyers borrowed an average of NIS 948,000, which was about 12% less than the record amount borrowed in July 2022 and the lowest amount since May 2021. Investor apartment buyers borrowed an average of NIS 920,000, which was a big drop from what was typical last year.

It’s obvious that the interest rate hikes made by the Bank of Israel in 2022 were a major factor in the drastic shift during the year. In light of this, the fact that the average monthly mortgage repayment rate increased to 30% of the average household income in December is hardly surprising.

The mortgage risk indices were comparable to the previous month’s levels. About 44% of the mortgages taken out were for at least 60% of the value of the homes purchased. However, a statistic that banks will need to monitor is the proportion of mortgages with monthly payments exceeding 30% of monthly income.

What about this year’s outlook for Israel’s real estate market?

Nadav Berkovitch, real estate analyst at IBI Investment House, told Isranomics that residential real estate is expected to face headwinds in the next twelve months for two reasons. To begin, interest rates will rise from their current levels as the Bank of Israel works to reduce inflation to its 2% target. As it is already a decade high, and debt-to-income is rapidly approaching the critical 40% mark, fewer and fewer buyers are willing to take out a loan to buy a home. Furthermore, with so many fixed income options available, prospective buyers and property investors can now put their money to work in less risky ventures. Unsurprisingly, the number of real estate transactions has decreased in recent months.

Secondly, rising finance costs will diminish profitability in the traditionally highly indebted construction sector. This year will reveal the stability of the balance sheets of real estate companies and whether or not they will be forced to sell assets to fund their operations. Needless to say, the residential real estate market is less optimistic than it was a year ago, when the cost of financing was close to zero. Therefore, until the Bank of Israel begins to reduce interest rates, these factors will dampen property investors’ enthusiasm.