Under the current circumstances, an economic crisis and rising interest rates would probably precipitate a housing crisis with mass defaults on borrowing, the Bank of Israel warned in a study of the housing market released on Sunday.
According to the study, compiled by economists in the central bank's research department, mortgages in Israel contain more risk than mortgages in the United States or in Europe. Approximately 20 percent of borrowers in Israel are at risk of defaulting on their loans.
Regardless, Israelis -- especially young couples -- seeking to buy homes were bullish on the housing market, signing 4.8 billion shekels (about $1.7 billion) in new mortgages and bringing the yearly scope for 2013 to a record 35.3 billion shekels (about $10 billion).
An average mortgage amounts to some 30% of monthly income, compared to 23% in Europe and 17% in the United States, the study said.
Between 2008 and 2012 the average price of a home increased by about 54 percent, while average household income increased by only 20 percent.
Results of the research indicate that due to the sharp increase in mortgage sizes in recent years, the average monthly payment for new mortgage borrowers increased at a higher rate than the increase in average household income. This was despite the sharp decline in interest rates on mortgages in recent years, and new mortgage borrowers taking out loans with longer terms to repayment than in the past. This development led to a marked increase in borrowers' risk levels in banks' housing credit portfolios, which was reflected by a sharp increase in both mortgage borrowers' payment to income ratio, which is currently high compared with other countries, and the share of high risk mortgages (with payment to income ratios above 40 percent). It should be noted that before the increase in home prices, borrower risk in Israel was similar to levels worldwide.
Dr. Benita and Dr. Naor, who compiled the study, emphasize in their paper that as a result of the sharp increase in home prices in recent years, banks' potential credit loss in the scenario involving defaults declined markedly for mortgages taken out before home prices increased, or in the early stages of the price appreciation. However, it is likely that in a scenario of a sharp increase in defaults with declines in home prices (as expected under the stress scenarios), banks will find it difficult to sell a relatively large number of properties. This development is liable to lead to an additional sharp decline in home prices and to make banks' credit losses more severe, as occurred in financial crises in other countries.
Supervisor of Banks directives published in August, limiting the payment to income ratio, the term to the repayment, and the share of the floating rate component in mortgages, work to reduce those risks.
"The Bank of Israel is ringing the warning bell with all its might. Whoever is taking out a mortgage ought to listen well and prepare accordingly," said Shahar Avishai, managing director of investment house Excellence ESOP Trust Company's mortgage consulting department.