It is all so predictable: the day that Governor of the Bank of Israel Prof. Stanley Fischer announces dramatic measures in the mortgage market, at the exact same moment, in the Knesset plenum, Minister of Housing and Construction Ariel Atias threatens a coalition crisis if the Ministry of Finance continues to oppose his plan to subsidize mortgages for homebuyers in the periphery.
Atias and Minister of Interior Eli Yishai have no chance against Fischer, who is always perceived as the responsible adult, while they are always suspected of putting Shas voters first. Although they run the Ministry of Housing and Ministry of Interior, which bear the primary responsibility for housing, every measure in their fields of responsibility is frighteningly slow.
Fischer, in contrast, has the power to immediately affect real estate, because he has the power to impose on the banks directives about mortgages and financing from one day to the next. Fischer is trying to cool demand and take effective action, whereas Atias and Yishai throw out declarations.
This is a paradox, since Atias and Yishai are the men with real power to change something with regard to home prices. They are responsible for the supply side - Yishai through planning and Atias through marketing by the Israel Land Administration.
There is no dispute that only a massive effort on the supply side - improving procedures by the planning and building commissions and increasing the ability to market land - only these measures can really lower home prices. But Fischer steals the show, as if he has real influence to lower home prices.
Last Wednesday, Fischer took an unprecedented step. As part of his intensive fight of the past two years to reduce the variable interest component of mortgages that homebuyers obtain from the banks, he ordered the mortgage banks to limit the variable interest component (prime interest rate, or linked to the Consumer Price Index (CPI) or foreign currency) of mortgages to one third of the total, from May 5.
It is obvious why Fischer is so determined in his fight against variable interest mortgages, but it is very doubtful if the new directive will help the real estate market in the sense of lowering home prices.
Fischer's primary job is to maintain the stability of the banks. As every central banker knows, banks collapse for one of two reasons: massive embezzlement or a real estate crisis. This is the lesson Fischer drew from the sub-prime crisis.
To some extent, Fischer is trying to correct a problem he helped create. A real estate opportunity was created following the global financial crisis, when interest rates were negligible and home prices were stagnating. A negligible interest rate mortgage, according to Fischer, was in effect a subsidized mortgage for homebuyers who took variable interest mortgages.
The proportion of variable interest mortgages recently reached the astonishing figure of 86%. When the interest rate was negligible, as was the case from the beginning of the recovery from the crisis, investors entered the real estate market en masse. Demand soared, driving home prices upward. The new high returns in the real estate market were far higher than any alternative in the capital market.
This is what scared Fischer. The banks became increasingly exposed to negligible interest rate mortgages, even as he quietly but surely embarked on the path of raising the interest rate, which has now reached 3%.
Fischer sees the terrifying scenario of the US sub-prime crisis: people without the means to repay their mortgages, which is the surest path to undermining stability of the banks. This is his responsibility. There is a small difference between the US and Israeli housing markets, because in Florida a person can stop paying, abandon his home and leave it to the banks, whereas in Israel, foreclosing a home does not exempt the borrower. Regardless, Fischer went to war against variable interest mortgages.
The first enemy was the buyers groups, as if it were necessary to punish people who found a legitimate tax loophole to buy apartments more cheaply. In early 2010, Fischer ordered the banks to restrict their loans to buyers groups. Home prices did not fall.
In mid-2010, Fischer intensified the campaign. In all cases in which a mortgage finances more than 60% of a home's price, he required the banks to make a special provision of 0.75% of the amount of the loan. Home prices did not fall.
In late 2010, Fischer declared a frontal attack against the biggest enemy of all: prime interest rate mortgages and all variable interest rate plans. The banks were required to increase their provisions for doubtful debts for loans greater than NIS 800,000 where mortgages exceeded 60% of a home's value. Home prices still did not fall.
Now comes the latest directive. Supervisor of Banks David Zaken declared that the meaning of the directive is a 1% increase in the cost of mortgages. True, there is a price hike, but they are not on the scale of financial catastrophe, and it is the price that mortgage holders will bear so that Fischer can fulfill his obligation to preserve bank stability.
Home prices are not set to fall substantially in the wake of the latest measure, either. Fischer is dealing firmly with the demand side, but home prices will fall only when there is substantial improvement in Atias and Yishai's areas of responsibility. There, we see only words.
Netanyahu, do the right thing
What needs to be done to lower home prices? First of all, disperse the illusion that in real estate it is possible to carry out dramatic and rapid action. This is a slow industry, which internalizes and implements changes at the pace of a tortoise. It is a fact that none of the measures led by Prime Minister Benjamin Netanyahu have yet to reach the implementation stage.
Netanyahu considers the passage by the Knesset of the Israel Land Administration reform bill as his greatest achievement. It happened in August 2009. The reform is basically sound, because it will enable the Land Administration to focus its efforts on the marketing of land instead of dealing with dealmakers and balconies.
The Land Administration reform is stuck because of the inability to reach an agreement with the employees who will retire, and meetings drag on in endless debate over minutiae. Minister of Finance Yuval Steinitz is apathetic to them.
If Netanyahu wants to have an effect, he must force the parties to end the saga and implement the reform at the Land Administration. This will have a positive effect within a couple of years.
In March 2010, the Knesset approved Netanyahu's bill to restructure planning and building procedures. There is no chance that this bill will pass this year, and many more years will pass before it is implemented. If Netanyahu wants to have an effect, the first thing he must do is to add personnel to the planning and building commissions at the Ministry of Interior.
But instead of taking practical measures with immediate effects, a few weeks ago Netanyahu announced the establishment of a national housing committees. In acronym in Hebrew is the charming VDL or "Vadal", which environmental groups promptly renamed Vandals. The announcement was made dramatically at a press conference. Everything is dramatic over there. But the national housing committees require legislation, and the issue is protracted and complicated.
When Netanyahu sees complications and home prices continuing to rise - he creates a new spin. All of sudden, the IDF is to blame because it is not moving fast enough to the Negev and vacating the large bases in central Israel in favor of homes for young couples. It is possible to buy such spin for only a couple of days of headlines.
Netanyahu - do the right thing: close the deal with the Land Administration employees so the reform can go ahead, and allocate sufficient personnel for the planning and building commissions now. Without dealing with the supply side, home prices will not come down and the social ferment will increase.
Fischer, for his part, will emerge clean as a whistle, because at least he is doing something to protect the banks from the danger of a real estate bubble and a Made in Israel sub-prime crisis.
Published by Globes [online], Israel business news - www.globes-online.com - on April 28, 2011
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