The recent spike in interest rates in Israel is being felt in the residential mortgage market in the country.
Data released by the Bank of Israel (BOI) earlier this week shows that the value of mortgages taken in August was at its lowest level since May 2021.
The decline comes after years in which Israelis flocked to take out mortgages with extremely low interest rates, as a housing crisis that has plagued the country for over a decade continues to rage.
Compared to 2021, there is a decline of almost 20% in the number of mortgages taken out by Israelis.
The BOI started to raise the interest rate in April, in response to rising inflation. The interest rate is currently at 2% and is expected to rise further. The initial rise of the interest rate, in small increments, to its current level did not have a major impact on the mortgage market at first. But, over the summer as it continued to increase, lenders responded.
“Similar to other products that drop in demand when prices rise, we are seeing the same in mortgages,” Moran Ofir, an associate professor at the Harry Radzyner Law School at Reichman University and visiting professor of Law at Columbia University, told The Media Line.
Yet, Israel is still knee-deep in a housing crisis with no end in sight. Increased interest rates do not counter the other forces that drive the market
“At this point in time, we see a slight decrease in the number of houses being purchased, so we are not seeing a drop in prices yet,” she said.
The main cause for Israel’s housing crisis is the huge gap between the low supply of properties and the increasingly large demand. In the past year, prices of homes have risen over 15%.
While in other countries inflation and rising interest rates have led to a decrease in home prices, in Israel there are other factors which keep property prices high.
Israel’s housing market behaves differently than those of other countries.
One reason is that the population in Israel is rising rapidly, with the highest fertility rate among the countries that belong to the Organization for Economic Co-operation and Development (OECD). For many complex reasons, construction of houses in Israel has not managed to fill the gap and experts estimate that there is a shortage of tens of thousands of housing units, which increases every year.
“When prices were raging, it was clear that the low interest was the fuel behind the price hikes,” said Dr. Ran Ben-Malka, a lecturer in the Economics Department at Sapir Academic College. “We are now witnessing contradicting trends in the market. As long as interest rates were low, all the factors led to an increase in housing prices. But other trends are still pulling prices upward.”
Even though cheap credit is a major factor in the crisis, it is not the only one. Israel’s housing crisis began in 2007. According to the Central Bureau of Statistics (CBS), real estate prices in Israel have risen by 107% since that year.
In addition, the government, as the main owner of lands in Israel, is still slow in releasing those lands for construction. “As long as the supply does not increase, the real problem will not be solved,” said Ben-Malka.
While data is still unavailable for the last few months, there is a chance that contractors will be less eager to build new homes for a public that will be buying less.
“We can presume that, even though interest rates are higher, we will not see a drastic change in housing prices,” Ben-Malka said. “In high-demand areas, we might even see a further increase in prices, while in other areas price hikes might freeze.”
In recent years, there has been an increase in construction starts, with an incompatible effect on housing prices that just kept going up.
“A slow-down in mortgages taken together with rising interest rates could actually result in an increase in real-estate prices,” Ben-Malka explained.
“In order for us to see a change, we need to see influence on both sides of the equation – supply and demand,” said Ofir. “If we see a decrease in the number of transactions but also a decline in the supply, we will not see a drop in prices anytime soon.”
The high interest rates are also causing people who previously bought real-estate as an investment and not for their own housing to think differently on how to invest their money.
Rising interest rates also make it more challenging for people to pay back their loans. For the average young Israeli couple that recently purchased their own home with comfortable return rates, the monthly mortgage payment to the bank has increased by a few hundred Israeli shekels.
With the interest rate expected to rise further, there could be an increase in the number of people unable to pay back their debt. If such homes then return to the market, this could lead to a drop in housing prices but create other problems among the population.
“Even if we will see a drastic reduction in housing prices, this is not good news for young couples,” said Ben-Malka. “The price of the apartment may be lower than before, but the interest rates mean the return payments actually increase the price of the property.”
However, the Israeli banking system continues to be rather strict in granting mortgages. It is this conservative policy that gave the country immunity from the global financial crisis of 2008, which saw other countries face the bursting of a vast housing bubble.
During these years, BOI data shows a substantial jump in the number of housing loans taken.
Research conducted by Ofir has shown that imposing regulatory restrictions on the mortgage market in order to rein in housing prices does not yield the desired result, rather the contrary.
With contradictory and sometimes competing forces currently only pulling prices up, or at the very least freezing them at their current level, Israel’s housing crisis appears here to stay.