On May 7, 2018, the Gazit-Globe Real Estate Institute and the Capital Markets Forum conducted a meeting addressing the topic "Where are banks taking the mortgage market in 2018?" Dr. Ziv Naor, Director of the Economic Unit of the Banking Supervision Department at the Bank of Israel, presented a review of the mortgage market and discussed the macroeconomic stability measures being taken by the Bank of Israel. According to Naor, the real estate market is characterized by boom-bust cycles, with an average of fifteen years between one boom and the next. These are correlated with financial crises, and financial institutions do not always take into account their impact on the market. For example, a bank that decides to conduct a syndication transaction removes the risky deal from its balance sheet, but the risk remains in the financial system. This calls for central planning that will require banks to appreciate their effects on the real estate market.
Macroeconomic stability measures can help address excess risk created during periods of accelerated economic growth. For the most part, their goal is to increase the resilience of financial institutions, especially banks, to shocks that can affect the system, such as housing prices, unemployment, income, interest rates, and so on. Macroeconomic stability measures are not intended to stop rises in housing prices, but rather to reduce the reciprocal influence between real estate prices and housing credit.
Over the past nine years, the Bank of Israel has taken fifteen macroeconomic stability steps (a great deal in comparison to the rest of the world). These steps can be divided into three main groups. The first group includes measures aimed at directing banks in the areas of underwriting, risk appetite and fairness towards customers. The second group deals with measures designed to improve the Bank's equity cushion, while the third group includes measures intended to ensure the stability of mortgage borrowers, and to stop housing and mortgage markets from mutually feeding into each other.
The macroeconomic stability measures conducted over the past nine years have reduced risk in mortgages: financing rates have declined, rates of return from income have declined, sensitivity to increases in interest rates has declined, investor rates have fallen, and the expected failure rates in distress scenarios has declined. The last step included easing the way that banks weigh mortgage risk assets, at a financing rate of 60 to 75 percent. This measure is designed to enable buyers to maximize their ability to take out mortgages, at 60 to 75 percent financing rates.
Arik Cohen, Director of Mortgages at Bank Hapoalim, discussed demand in the mortgage market, saying, "following the moderation of mortgage demand in 2017, this year started very well, and last March the demand for mortgages was twenty percent higher than in the previous year."
He also addressed help that is given by parents to their children in taking out mortgages. "There are quite a few places where real estate prices are high, as are mortgage loans, and couples do not have enough income to take out a mortgage of that size," he said. “Therefore, many times, parents commit to 20% of the mortgage directly from their bank account.”
As for mortgages offered under the "occupant cost" program, he said that the activity of home buyers, measured in "occupant cost," is only at its initial stages, and the proportion of those who take out mortgages is increasing. Buyers receive a benefit through this program; they can take 75% of the value of the apartment rather than the purchase price, which can reach up to 90% of the actual apartment price – this is a significant benefit. In addition, under some circumstances, grants are included in shareholder equity, so that the actual amount of equity required for a home is very low. "In terms of the societal aspect, it's excellent. From the perspective of strengthening the periphery, it's great, and brings in quite a few borrowers who contribute very little money from home for the benefit of the deal."
"There is a clear trend of reduced mortgage prices; spreads fall by a tenth of a percent and competition is significant, with all the banks in the game," he said.
In response, Dr. Efrat Tolkowsky, CEO of the Gazit-Globe Real Estate Institute, said, "For some reason, competition between banks has not decreased retail lending. For many years, retail loans have been viewed as distinct from mortgages, and as being more profitable. For some reason, unlike retail loans, competition in mortgages is strong.”
