Israeli mortgage lenders are under threat from a likely downturn in the housing market. House prices have risen 58% since 2007, but the most recent data from Israel’s Central Bureau of Statistics show a month-on-month decline in prices in August: the first such fall since 2008.
With little space left for further bank consolidation and regulators discouraging international expansion, the mortgage market has been one of the few areas where Israeli banks have had opportunities to expand. Housing credit has risen roughly 60% during the past five years.
"We’re seeing the start of a slowdown. Affordability has been pretty stretched for the past few years and now prices are starting to drop," says Terence Klingman, co-chief executive of Israeli brokerage Meitav.
Part of the reason for a decline in prices is an increase in supply. The stock of land for building in Israel is mostly government-controlled. The Israeli government has responded to higher demand by freeing up more land.
Bank of Israel governor Stanley Fischer clashed with housing minister Ariel Atias last month over the supply of land. Atias favours greater supply increases, whereas Fischer is concerned that too much supply could have a long-term negative effect on both the real estate market and the construction industry.
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| “Building should be in sync with long-term housing needs” Stanley Fischer |
"Building should be in sync with long-term housing needs," Fischer told the Knesset finance committee. "We must not take steps that look good in the short term but that will harm the public in the long term. Building 40,000 housing units a year is a good number. More than this could lead to a negative trend." Israel has seen mass protests over the cost of living in recent months, with concern about housing costs one of the central complaints. Dan Harverd, analyst at Deutsche Bank, says the protests could help drive down prices.
"Since the summer, there has been a focus on the cost of living," he says. "The psychology of the market has changed. Before the summer, people were in a rush to buy as they were concerned that house prices would go up by even more. Now people are hoping for prices to come down."
Israel’s export-dependent economy is suffering from the eurozone crisis too. Growth slowed from 4.7% in the first quarter to 3.4% in the third quarter. Eldad Fresher, CFO of Mizrahi Tefahot, the country’s fourth largest bank, says over-supply of housing could trigger further economic downturn.
"A drop in the wealth effect could lead to a drop in private consumption," says Fresher. "This would be harmful when exports are decreasing because of turmoil in Europe and the US."