The mortgage market is going backwards. The big question is just where exactly. The average volume of mortgages taken out in recent months is similar to those taken out at the end of 2020 and the beginning of 2021. But the decrease in taking out mortgages has only been increasing in recent months, and it is not impossible that this market will continue to step back further, and in frightening proportions. 2022 will be remembered as a year in which more mortgages were taken out than in any other year, but also as a year of acute crisis, which is well known where it began – but it is impossible to know where it will end.
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The interest rate hikes had an immediate effect on the real estate market, and consequently also on the mortgage market, and we can expect some significant changes that have taken place in this market in recent months.
1
The year that broke in the middle
This year began with large monthly jumps in mortgage volumes, each month compared to its counterpart in 2021; In the first quarter of 2022, mortgages were taken in volumes of about 55% more than those taken in the first quarter of 2021.
However, in April, the Bank of Israel began raising interest rates, and the celebration gradually faded. Until June, the mortgage volumes continued to be higher than those of the corresponding months in 2021, and since then the differences have been getting smaller and smaller; Since July 2022, the volumes of mortgages taken were less than those of the corresponding months in 2021, except for September, when there was an increase in mortgages, only because September 2021 was a month of Tishrei holidays. Towards the end of the year the declines in volumes have already reached levels of 40%.
Since the mortgage data precedes all other data on the real estate market, we do not yet have information on the number of transactions carried out last month, however, from reports on the ground, the number of transactions continues to decrease by dozens of percent compared to 2021, so it is not impossible that mortgage volumes will also continue to fall.
To what levels? As mentioned, we are currently back in terms of the number of mortgages to the level of the end of 2020 and the beginning of 2021; In terms of transaction volumes, the period is more similar to 2018. The reason for the gap is the average mortgages taken out these days, which are almost 40% higher than those taken out in 2018. They are one of the important factors that still keep the apartments at their high price levels.
2
Despite the interest, more expensive apartments are purchased
Is it possible to draw a financial profile of the mortgage borrowers? The data of the Bank of Israel can provide us with food for thought in this regard. Let’s start with 80% of the market, which are the buyers of the apartments in the free market, not for investment purposes, that is, young couples and housing developers.
These took an average mortgage of about NIS 948,000 last month, a decrease of about 12% from the record recorded in July 2022 and the lowest number since May 2021; Investors took out mortgages with an average amount of NIS 920,000, which is also significantly lower than what was customary last year.
It could be estimated that when lower mortgages are taken, this would indicate the purchase of cheaper apartments and lower mortgage repayments, but this is not what is happening: the weight of apartment buyers at prices of NIS 3 million and above reached at the end of 2022 approximately 30% of all mortgages taken out, while Earlier its weight reached 25%. In addition, the mortgage repayment rate from the total household income reached 29.1% in December 2022, while in December 2021 it stood at 26.6%.
From this we can learn a few things: First, the interest rate has jumped the repayments on mortgages to such a high level that even if the borrowers settle for lower mortgages – they still pay higher repayments than before. 47% of borrowers pay monthly mortgage repayments that are higher than 30% of their monthly income, which is a very large increase compared to December 21, when only 37% of borrowers paid mortgage repayments at such a level. Interest rate increases contributed to this jump, but also price increases.
On the other hand, it can be learned that the buyers of the cheap apartments abandoned the mortgage market to a greater extent than the buyers of the expensive apartments. This could imply that the first to leave the market are members of a low socioeconomic status; The members of the middle class who are still in the market are buying more expensive apartments, taking out lower mortgages, and perhaps supplementing equity through other sources, and the mortgage still oppresses them more than before.
3
Buyers of “Residential Price” increased their mortgage
The buyers of the apartments in the discount programs “price for the resident”, “housing at a reduced price” and “apartment at a discount” are exceptional in that the apartments they purchase are marketed as part of projects that are randomly marketed. The prices in these projects remain fixed (with the exception of the linkages), therefore the amount of mortgages depends very much on the projects and does not depend at all on the changes in apartment prices on the free market.
In a normal situation, it could be expected that the interest rate increases would have the effect of reducing the mortgages that the buyers take, but what happened was the exact opposite: in the second half of 2022, these buyers significantly increased the mortgages they took to purchase the apartments they won. From the beginning of 2022 until the end, they increased the average mortgage they took by about 40%, and in the last quarter of the year they crossed the threshold of one million shekels for her mortgage.
The reason for this lies in the discount currently inherent in the price for a resident, which due to the sharp price increases of 2021 and 2022 has reached levels of more than half a million shekels in many places, which many feel cannot be given up. And so they prefer to take out heavy mortgages and take a financial risk, but earn the discounted apartment.