High Price Apartment Solution: Higher Mortgage, Lower Interest, Easier Credit

Gindi, a leading real estate developer, market luxury in Tel Aviv (Israel)

As Israel's real estate prices soar, banks are not sitting by the sidelines. Banks are making home buying easier than ever before. Israelis are taking more debt, at a faster rate, worrying the central Israel bank regulators. Yet Israeli mortgage is not as leveraged as the US and European markets were when the real estate bubbles collapsed there. While Israeli regulators and policy makers (i.e. government agencies) are worried and taking steps to lower the market's exposure to collapsing prices, Israelis are still following the path buyers in the west went down before. Are Israelis not aware of the danger in taking high percentage mortgages? Are Israeli banks unaware of the risk in a collapsing housing market? What about the regulators and policy makers, are they not aware of the economic collapse due to real estate bubbles? Well, it is not the case of now knowing or misunderstanding. But it is a case of “this happens to others, not to me” (or to “us” here in Israel). We call it the “ostrich behavior”, stick your had in the sand when you are being chased. You don't have to be Australian to understand the ostrich analogy. Pretty much every western culture understand ignoring reality and hoping not to fall in the same situation as others. Just keep on ignoring things enough, and hopefully things will take care of themselves.  

The difference between the Israeli real estate market and other western markets may be a justification of the ignorance of credit risk. Israeli real estate market is both conservative and highly regulated. The conservative side comes from limited credit risk history. Banks and other lending institutions, in general were not willing to take high risk in lending. This was true until about a decade ago, when banks realize the benefit of offering more credit. Both the banks themselves and the overall market saw growth and profit in extending more credit to riskier clients. Once credit to individual increased, first gradually, then to a higher level, banks and regulators realized, or maybe estimated, that market failure was highly unlikely. The justification came in terms of the still low leverage and growing need in the market. Israeli home buyers were willing to take 50% mortgages, but not the 80% to 90% common in the US and Europe. In addition to the low leverage, defaults were at such a low rate, banks were willing to take the risk and offset default with higher interest rates. This was possible by the almost zero official interest rate determined by the bank of Israel. Finally, since the real estate market was growing at a steady rate, and home prices were rising steadily, both banks and regulators did now worry about a bubble burst.

Now the question looming on the horizon is “how long can credit expand before it becomes a risk to the market and the economy?” This is the kind of question most Israelis want the regulators and banks to solve on their own. Like most home buyers, once you can get a loan from the bank, you worry about making the monthly payments, not defaulting because of a weak market or price collapse. While some Israelis take risks with high monthly payments, most try to keep their payments low. There is still a tradition of a family helping first time buyers by lending them enough money to buy an apartment right out. Family loans tend to become gifts, which makes first time buyers a very low risk to banks. But the situation in Israel changes constantly. Both the economy as a whole and the real estate market are the the whims of rumors and speculators. Prices rise quickly at one time. Then the market freezes and sales dry up for a while. Israel's economic landscape is full of swings for all kind of reasons. So keep your eyes on the market, and invest carefully.