The Marker, Hadar Horesh, 27.05.2021

The risk for mortgage borrowers in recent times is increasing: rising prices in the housing market, and fears of a rising trend in the absence of a stable government, are forcing thousands of young couples and other buyers to increase the mortgages they take from banks to finance home purchases. While contractors and banks are making record profits, homebuyers are taking bigger risks than ever before - a rise in unemployment, an economic crisis or just a rise in interest rates, which is to be expected, could wreak havoc on thousands of families leveraged to the last shekel in their monthly salary.

According to Bank of Israel reports, the reason for the crisis in housing prices, which have risen in recent years at an annual rate of 10%, is the shortage of apartments in the face of high demand. This is largely true. Three years of dysfunctional rule and chaotic housing are doing their part: budgets The development for new neighborhoods is not transferred on time, the government land tenders that are supposed to serve the new construction do not meet the demand and at the same time the volume of construction starts decreases.

But rising land and housing prices are a global phenomenon whose main fuel is zero interest rates. Low interest rates are pushing consumers and investors to buy apartments, and when money is cheap, property prices are rising. The Bank of Israel, which controls capital prices in Israel, is the main cause of rising house prices.

With the rise in apartment prices, the volume of credit in the industry increases. A short chapter in the annual report submitted yesterday by the Supervisor of Banks , Yair Avidan, was devoted to the mortgage industry - the main engine of growth of the banking system, and by definition the Supervisor has the best share of their credit portfolio. Higher growth than that of the high-tech industry.

Much of the increase is attributed to the occupant price plan, to which most of the government land tenders in 2016–2019 were dedicated. The government has greatly reduced the plan but the tenders held in previous years have matured in the last year.

"The share of buyers of a single apartment in the total performance during the year was 50.3% compared to 48.3% in 2019," the report reads. The volume of mortgage performance under the price-per-tenant program was NIS 11.5 billion, an increase of about 65% compared with the previous year. "

Apartment Fair. Those photographed have nothing to do with what was said Photo: Nir Keidar

Mortgages have doubled

An absentee figure from the report is what happened to mortgage takers as part of the price per occupant over the past year. An analysis of the average mortgage volume in April this year compared to February 2020, on the eve of the Corona epidemic, reveals an 86% increase NIS 941,000, which means doubling the financial burden of mortgage payments on apartment buyers as part of a price-per-tenant program.

The Bank of Israel has not yet examined the reason for this increase. According to the bank, one of the reasons for this is a change in the location of the mortgaged apartments and their prices. But the changes in the plan and location of the apartments do not justify doubling the mortgage amounts, and there is almost no doubt that borrowers use the most credit to buy an apartment whose price has hardly risen. The Bank of Israel does not separately examine the eligible person per occupant in the monthly repayment index from disposable income.

The overall growth figure in the market indicates a 20% increase in the average loan repayment, from NIS 729,000 to NIS 866,000 - far beyond the 5% increase in housing prices during this period.

Another index that indicates an increase in risk is the volume of loans at a high leverage rate, ie loans that constitute 60% or more of the value of the apartment used as collateral against the mortgage. According to the report, the rate of total mortgages increased between February 2020 and April this year from 38% to 40%.

It is precisely the rise in housing prices that fuels the tendency of banks to unleash risk-averse borrowers. Because the main risk index is the ratio between the value of the apartment and the size of the loan, this ratio decreases as the price of the apartment increases, and the bank can indicate a decrease in the credit risk it gives.

Tel Aviv Apartment Fair Photo: Moti Milrod. Those photographed have nothing to do with the article

The parents take too

Another measure, and no less important, is the monthly repayment rate from the family income. This index actually shows relative stability while a slight increase in risk levels. Compared between February 2020 and April this year, the loan repayment rate rose from 25.8% to 26.6%.

However, the fact that the average repayment rate in relation to family income has not risen sharply is not a reassuring factor, as it does not reveal what has really been happening in recent months at mortgage bank branches and does not reveal the risks to which young couples are pushed. The data do not show a correlation between the increase in the average loan amounts and the repayment amount, assuming that there was no dramatic jump in the wages of mortgage borrowers. Part of the explanation is related to the profit procedure of bringing in another borrower: when the required repayment rate exceeds the limits of the Bank of Israel (50% of disposable income), another borrower can be put in, usually by the couple's parents. As far as the bank is concerned, this corner is closed, but the family division of the burden does not necessarily improve the situation of the borrowers.

In recent years, the Bank of Israel has pursued an almost consistent policy, with a few exceptions, that supports increasing credit for housing, while increasing the risk to borrowers and putting pressure on the banks that have fallen into their hands. The banks tended, according to the Supervisor's testimony, not to allow borrowers, among others, first-time home buyers, to reach the maximum leverage restrictions, or to make these loans considerably more expensive. The Supervisor of Banks has therefore decided to ease the risk limits for housing loans at a financing rate of 60% –75% of the value of the apartment. The goal, among other things, was to prevent borrowers from completing a mortgage through expensive consumer credit. The result according to the report: "The weight of borrowers who took out loans at high financing rates increased significantly with the application of this step, and it appears that this relief did help borrowers exhaust their ability to purchase an apartment with 25% or 30% equity for housing improvers."

The concessions also helped the government to market the price-per-tenant plans, which were not necessarily intended for the weaker sections. Further relief allowed the occupant plan beneficiaries to increase the leverage rate up to 90% of the value of the apartment, through an appraisal of a kit according to its market value and not according to the reduced price at which it was sold. This is despite the fact that in quite a few cases it turned out that the market value of apartments in the program was lower than the "reduced" price at which they were offered and thousands of apartments were left without buyers.

In certain periods, the Bank of Israel also acted in the opposite direction, limiting the banks' ability to grant loans through a one-percent deposit obligation on the Bank of Israel and limiting the loan rate at a reduced interest rate ("prime interest rate"). However, the prime interest rate limit was reduced at the end of last year. In September, the banks' deposit order is also expected to expire, and in the coming weeks the bank is expected to consider whether there is room to renew it. The decision may be significant as if the provision is revoked it could further fuel the mortgage and housing market.