If you had told us, just a year ago, that people were selling their apartments in a panic and buying smaller apartments, we would have laughed out loud. Honestly, it sounds weird. Let’s open a calculator for a moment. The difference between a 4-room apartment and a 5-room apartment in the second and third circles should be something like NIS 200-250 thousand. Now do the math. NIS 20-23 thousand per meter on average, something like 10-12 meters of addition to the house. This is also the price with contractors.
But here came the Bank of Israel’s interest rate, after a decade of zero interest rates, and changed the picture (all the government programs such as the housing price failed for a decade in stopping the rise in prices, and even the increase in the last two years in construction starts cannot explain the collapse so quickly). Then only the interest rate remained, and it arrived in full force and affected the market quickly and sharply: the interest rate in the economy rose quickly from 0.1% to 4.25%, and no one guarantees that this is not the end of the process. The bond market today signals, for example, that the interest rate in Israel will still rise (for expansion).
The meaning of the interest rate increase in such a sharp way is a jump in the prime interest rate from 1.6% (and people actually received less than 1% in the prime route in the mortgage) to 5.75%. A monthly addition of NIS 1,000-1,500 for the mortgage repayment. And there are those for whom it even reaches 2,000 and 3,000 monthly addition for the mortgage repayment (depending on the amount of the mortgage taken). It’s not that the Bank of Israel had any other choice, inflation soared and he had to hit the hammer quickly, in order to cool the demand and stop it. So far he is only halfway there. Inflation is still stubborn and remains at high levels of 5.2% in the last year. High inflation is a much greater danger to households than mortgages – it erodes money (here’s the explanation). High inflation cuts the value of money by tens of percent. But the result is a painful increase in mortgage repayments.
Your next question should be – is the new term in the market, “housing downsizers”, meaning those who sell an expensive apartment and buy a cheaper one because they can’t keep up with the repayments, even true. After all, if a person sells his apartment and buys a new one, he has costs. He pays twice to a lawyer, once or twice to a realtor, an appraiser in order to obtain a mortgage, often also purchase tax and possibly also appreciation tax, if he sold his apartment in less than 18 months. So you want to tell us that a person prefers to make a concession of 200 thousand shekels, to pay between 100-150 thousand shekels back, in order to save a few hundred shekels on the mortgage? Sounds illogical.
Now take a breath, because there is a logical explanation for this. In a review by the chief economist, it was found that the difference between the new properties being bought and those being sold is NIS 730,000. That is, these reduce housing. Selling a very expensive apartment and not only giving up a room, but also can give up areas of demand. This can be understood. Because his average mortgage for the same couple drops by half, if not more. Cut the meat, there is no choice.
But we have something else to tell you, which I’m not sure you saw in the data. “It is not certain that there is a new phenomenon here,” he explains Alex Zbzinski, Chief Economist of Meitav Investment House. “We read the review of the primary economist. She took the ratio of housing improvers out of the total of those who bought an apartment at a high price (according to the review, there was a significant decrease in the proportion of those who did improve housing, that is, they bought an apartment more expensive than the one they sold – from a rate of 75% in March last year, this rate decreased to 66% in January of this year, AI). You can’t learn anything from it. You can understand that the amount of housing improvers has decreased, but that does not mean that there are more downsizers. In my opinion, today there are more elderly couples who have left an apartment and bought a small one, because the children are leaving home. If she had shown that the number of couples and households who moved to a smaller apartment increased, we could learn something. But there are other reasons.”
What do you see?
“That this crisis permeates deeply on the one hand, but I still don’t see people starting to have difficulty repaying their mortgages and selling. I don’t see big delays in repayments. If that happens, people will start to make such a move – but it’s at the end. As you said, it involves a lot of costs. You Seller and buyer, there are taxes and brokerage. In the end it’s the same. It’s true that we saw that the difference was NIS 730,000, but that’s the average price of the apartment they sold compared to what they bought. This figure doesn’t mean much to me.”
When will interest stop?
“I think it is likely that the interest rate will rise another quarter of a percent and then – maybe it won’t go up any more. That’s according to our forecast. Inflation has already started to drop a little. Maybe this is just the beginning of the process. We’re dropping to an annual rate of 5.2%, in two months it will drop to around 4.7% – 4.5% and will continue to decrease. Therefore, it is possible that in a quarter of a percent the Governor will stop. If he sees that it does not help, he may need one more increase. But he does not want to exaggerate and raise interest rates too much, because in the end the prices paid by households and mortgage holders are heavy. There is no need To exaggerate. This is the narrow bridge on which he is trying to walk. Not to exaggerate on the one hand. On the other hand, to ensure that inflation returns.”
Households are angry. They don’t currently see the effect of the interest rate increase, other than hitting their pockets.
“It will not benefit the public, but there is no intention to benefit the public either. In general, they are trying to wrap the interest rate increase in a nice wrapper. The meaning of an interest rate increase is a negative effect on households and companies. To lower inflation, you make people consume less by reducing disposable income . And that’s even before the labor market is hit, that too will come at some point. That’s why there is a monetary contraction or an interest rate hike.”
Why does he prefer an interest rate increase over maintaining the households?
“Because inflation, over time, is much more annoying. It is better to suffer in the short term and return inflation to the 2% region than not to do the work until the end. The erosion of the purchasing power of money hurts more. There is no miracle cure. Therefore, most times at the end of an interest rate increase there is a recession” .
And on the other hand – people will not be able to afford the repayments. Inflation will stop, but households will collapse. They sell a 5-room apartment, and buy 3-4.
“There is no intention to bring about a collapse, but it could be a result of the war on inflation. I don’t see a collapse, I do see that people are feeling it in their pockets, but as I said before – there are no significant mortgage arrears. I don’t see layoffs yet, I don’t see salary cuts yet In the meantime, it’s a lot of noise. There is a lot that is difficult for them, but we haven’t reached the hard part yet. Maybe we will, because in the end the question is whether inflation will drop first and we will only see a slowdown in growth or something more serious. There is no forecast for a recession, only a slowdown. This is the price of returning Inflation is the target. We will go hand in hand with it, step by step.”