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  • Balance-sheet credit from the five large banking groups to the construction and real-estate industry continued to grow vigorously (14 percent) in 2023, as before. This outcome was attained despite the increase in industry risk, particularly in view of the slowdown of housing-market activity, rising funding costs, and the effects of the Swords of Iron War.[1]
  • The increase in industry risk was reflected in an upturn in the coverage rate of the credit-loss allowance relative to credit taken by the industry. This rate increased throughout the banking system by 0.5 percent in the course of 2023, ending the year at to 2.4 percent, mostly due to the effects of the war.
  • This box describes the developments in bank credit to the construction and real-estate industry parsed by the following activities:
  • Credit for funding of land—the decrease in housing demand induced, inter alia, a decline in the success rate of land auctions and in winning prices in auctions successfully closed. Concurrently, the Banking Supervision Department demanded an additional capital allocation for high-leverage lending for land. These measures slowed the growth rate of credit for land financing relative to previous years.
  • Residential construction loans—2023 saw a hefty 66 percent increase in financial credit for residential construction. The increase traced to the slowdown in sale of dwellings and occurred despite impediments to progress in construction when the war broke out.[2]
  • Income-producing real estate—the share of high-LTV credit for income-producing office and commercial real estate increased in 2023, for reasons including oversupply in the market for office space in certain parts of the country. As for income-producing residential real estate, the increase in the interest environment and changes in taxation made activity in this field less worthwhile and some companies chose to put up for sale dwellings that had been rented out or that were intended for rental from the outset.
  • Credit not secured by real estate—much of this credit is extended for the activities of performance contractors. The risk in financing performance contractors was high even before the war broke out; since then, performance contractors have been exposed to additional risks, particularly labor shortages and increases in costs of labor and raw materials.
  • Pursuant to the upturn in risk, the Banking Supervision Department is closely monitoring developments in credit to this industry and is acting to ensure that the industry’s credit risks are monitored and managed in accordance with accepted and appropriate risk management practices.

 

[1] For elaboration on economic developments in the housing market, see the Bank of Israel Annual Report for 2023, Chapter 8, and “The Housing Market.”

[2] Financial credit for housing construction loans purposes increased and the gap between construction costs related to progress in project performance and cash flow obtained from the sale of dwellings widened.