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How new mortgage rules in Israel will affect foreign investors

Israel is the hottest real estate market in the world. There are many reasons for this: stable banking system, conservative mortgage practices, growing young population, limited supply of new housing and land for development and low interest rates. A steady increase in prices have attracted foreign investors into the Israel market and pushed prices even higher.

Modiin

Modiin

Stanley Fisher of the central bank is trying to slow down the market by trying to keep out speculators without harming the chances of first time home buyers to purchase a home. The best solution according to Fisher is to increase supply. The second step is to make it less attractive for foreigners to purchase luxury vacation homes using Israel mortgage funds.

An excellent article in the Jerusalem Post explains the situation clearly and shows how foreigners will be affected.

Bottom line is what we’ve been recommending to our foreign clients for the past year:

1. Try to avoid the luxury developments targeted to foreigners.

2. Look at real neighborhoods populated by real Israeli families which are following a “real supply and demand market.”

3. Put 40 – 50% percent down payment and take out a 50-60% mortgage are very low interest rates. (Keep your mortgage limited to NIS 800,000 – currently about US $220,000.

4. Look for deals where the sales price is as close to replacement cost as possible (current construction costs are about $1000 per meter).

5. That means looking outside of Jerusalem and Tel Aviv at properties between $300,000 – $450,000. (unless you have a larger down payment).

Here are some key points from the article by Matti Munk of Mercantile Discount Bank:

As the Bank of Israel takes on its shoulders the responsibility of lowering house prices in Israel, the biggest losers will be the overseas investors who are purchasing holiday homes or residential properties in Israel.

Since most of these buyers are purchasing homes in areas that have become over-affiliated with this very specific market, prices in these areas are likely to see a reduction in value over the next 12 months of up to 15 percent, as result of the limitations of receiving mortgages.

Last week Bank of Israel Governor Stanley Fischer dropped a bombshell on the banking world, implementing new rules to quell the booming housing market in Israel.

When the dust settled, it became clear that the average first-time Israeli buyer will not be in the frontline of the attack, and their dreams of owning a home in Israel are unlikely to be shattered.

When one takes a mortgage in Israel, the interest rates are considerably lower than a regular commercial or home-equity loan. This is because the banks have a lower equity-ratio requirement by the Bank of Israel on residential purchase loans, effectively allowing them to make more loans with the same amount of equity. This being the case, they allow themselves to reduce margins on these loans for the benefit of the borrower.

The Bank of Israel effectively put a stop to this lower equity ratio, which will in turn raise interest rates and should lower demand for real estate. However, Fischer excluded from this new decree anyone who abides by one of four conditions: anyone borrowing less than NIS 800,000; anyone who is borrowing 60% or less than the value of the house or purchase price; anyone who has Construction and Housing Ministry eligibility; anyone who takes a fixed-rate for at least 75% of the loan.

The average Israeli first-time buyer should not be damaged by these new decrees. Overseas buyers, however, are likely to receive the brunt of them. They obviously, as non- Israelis, are not eligible for Construction and Housing Ministry loans, and the vast majority of them are buying on the high-end luxury market, asking for mortgages in the range of NIS 1.5 million to NIS 2m.

Since fixed foreign-currency interest rates are relatively high, they are left with the new reality of having to put down as down payment at least 40% of the value of the property.

With these rulings, Fischer’s main aim is to maintain a firm and stable banking system.

He is learning from the mistakes made by US and European banks that continued lending against properties despite the peak in the cycles, creating financial powerhouses to topple when prices dropped. He is also protecting the general public, lured by low interest rates, from borrowing according to their current means, but ignoring the consequences when central banks start raising rates.

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2 Responses to “How new mortgage rules in Israel will affect foreign investors”

  1. what is the effect on current owners willwe see interest rates rise on loans tied to Libor?

  2. Shmuel says:

    Existing mortgages are not affected by the new rules.