Will housing prices fall? The Bank of Israel is trying to curb leverage in real estate

The Bank of Israel is trying to cool the banks’ exposure to real estate.

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Recent inspections conducted by the Supervisor of Banks regarding the banks’ exposure to the real estate industry have indicated an increasing risk. It was therefore decided to oblige the banks to increase their restricted capital for high-leveraged land financing credit.

Under the new regulations, when a bank grants credit of more than 75% for the purchase of land, it will be required to seize 15% of the loan value in its balance sheets, compared to 10% in the current situation. The Supervisor emphasized that this is a capital restriction specific to the land phase, and after construction begins, the bank will be able to reduce the restricted capital to 10%.

The inspectorate noted that the tightening of conditions for the purchase of land may also fight housing prices, which have risen by 13% in the past year. This is because buying land with leveraged credit has allowed some real estate companies to offer particularly high prices for the land and then try to incorporate it into housing prices.

According to industry estimates, increasing the capital tied up will not completely stop the leveraged land financing offered by the banks, but will reduce its scope as it will be less profitable for the banks. These measures may reduce land prices and housing prices. However, the regulator clarified that lowering prices was not a major goal in implementing the restriction.

Beyond the financing restrictions, the reporting requirements for exposure control to the construction and real estate industry will be expanded. Banks will report, among other things, which projects they are exposed to, in order to better analyze the developing risk unique to raw land, construction projects and ready-made projects.

The Supervisor will also ask the banks to report the rate of construction compared to the rate of sales in the project. If construction progresses at a rapid pace from sales, supervision may prohibit attracting surpluses.

This is due to a phenomenon in which banks and contractors take advantage of the classification of residential construction projects as collateral, and with the application of construction attract capital that is considered “surplus”, and was part of the capital requirements in the construction process. The capital attracted by the banks is used by them for the purchase of land and other projects. This procedure is kosher, but it increases the risk of the real estate industry, due to the creation of a possibility for a situation where the continuation of the project will not develop as expected and the contractor will be left with confined capital that does not provide for possible compensation to buyers.

In addition, against the background of the difficulty of examining the risk of exposure in light of differences in the analysis of projects between banks, the Supervisor will send representative examples of underwriting and credit classification processes. In this context, examples of representative cases that arose during inspections carried out by the Supervisor with regard to credit to the construction and real estate industry will be published.

In the past year, there has been an increase in credit risk in the banking system for the construction and real estate industry, which has been reflected in an accelerated increase in credit balances and in the risk characteristics of the industry in some banking corporations.

During 2021, the balance of credit in the construction and real estate industry in the five largest banks increased by NIS 5.44 billion, an increase of 26% compared to 2020. The two largest banks, Hapoalim and Leumi, were particularly prominent in increasing their exposure, both approaching the limit imposed by the Bank of Israel. in this field.

According to the Supervisor of Banks, in order to prevent over-risks from exposure to one area, banks are not allowed to allocate more than 22% of their credit to real estate projects and 26% to real estate and infrastructure projects.

The regulator has been trying to calm the boiling real estate market for several months now in a number of steps. In August, the bank decided that a mortgage on a residential apartment could not be considered part of the equity to purchase another apartment. For the purpose of purchasing a number of apartments, in addition, the Bank of Israel increased the capital foreclosure for the banks with mortgage financing by 1%, after easing the foreclosure rate during the corona period.

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