Israel ripe for mortgage crisis, BOI warns

Housing prices continue to climb as wages grow more slowly. According to Bank of Israel report, some 20% of borrowers in danger of default

Shoshana and Moshe (not their real names) have two young children, aged four and six. Both work in mid-level government jobs, making a combined salary of $3,500 per month after taxes.


Three years ago, they bought an apartment in a middle-class neighborhood in Jerusalem for $380,000, taking a mortgage for more than three-quarters of the value.


Today they pay $1,200 per month on their mortgage, and they still owe about $350,000. They’ve taken several loans to cover the mortgage whenever they run short, and have a negative bank balance of about $10,000.


“With all of the rest of our expenses, we’re simply not managing,” Shoshana told The Media Line. “But I’m religious and I tell myself that it will all work out. I try not to worry about it.”


A new report by the Bank of Israel warns that the country is ripe for a housing crisis. Between 2008 and 2012 the average price of a home increased by some 54% while average income went up by 20%. That means young couples need to take higher and higher mortgages if they want to buy an apartment.


According to the report, written by two economists in the Bank of Israel’s Research Department, some 20% of borrowers in Israel are in danger of default, a higher rate than both Europe and the United States. That said, the rate of foreclosure in Israel is very low.


“Because you have a constantly appreciating market, people do everything they can to pay on time,” Chaim Friedman, the managing director of First Israel, a mortgage-brokerage firm based in Jerusalem, told The Media Line. “If the payment is coming up, they’ll call their brother, their uncle or even their mother-in-law to get the money put in their account.”


Shoshana agrees, saying she always pays the mortgage first, even if she has other outstanding bills. A few times, relatives have helped her out, she says.


Non-residents buying apartments

Housing prices continue to rise for several reasons. There is a severe shortage of land on which to build. Some economists argue that the market stays artificially high because non-residents are buying apartments, especially in Jerusalem. They pay top dollar and the apartments are only used a few weeks per year for vacations.


Economists estimate some 40% of Jerusalem apartments are owned by wealthy American and French Jews. The city has been debating a proposal to double property taxes for apartments owned by non-residents.


Five years ago in the United States, a mortgage crisis led to tens of thousands of foreclosures. Banks, eager for customers, gave mortgages for 80-90% of the purchase price. When the financial crisis hit and unemployment shot up, many people couldn’t make their mortgage payments and eventually lost their homes.


In Israel, unemployment remains low at around 6%. A 2012 law limits the amount of the mortgage to 75% of the purchase price. In reality, it’s usually closer to 55% of the price, as parents and relatives often help young couples make the down payment.


In the US, less than two-thirds of Americans own their own home. In Israel, almost three-quarters do, and many of the owners are young families who would rent in the US. But in Israel the rental market is limited and prices are high.


Shoshana and Moshe say they’d be paying even more than their current mortgage if they could even find a rental apartment. They say that despite feeling squeezed, they would rather pay a mortgage than rent.


“Israelis don’t like feeling like friers,” Friedman said, using the Israeli term for a “sucker.” “They’d rather pay their own mortgage than someone else’s mortgage.”


The problem could arise, he said, if there was a dramatic drop in home prices or a sharp increase in unemployment. If prices dropped significantly, homes would be worth less, and it would be easier to walk away from the high mortgage payments. That’s unlikely unless there’s a war or the Israel Lands Authority opens up large tracts of land for building.


Until that happens, young couples like Shoshana and Moshe will continue to take large mortgages, and continue to struggle to make the payments. But at the end of 30 years, they say, they’ll own their home free and clear.


Article written by Linda Gradstein


Reprinted with permission from The Media Line



פרסום ראשון: 09.17.13, 07:34
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