Analysis of the growth in new mortgage borrowing
Since the beginning of 2018, the number of new home purchases increased, and in particular the share of new homes among first home purchases grew
- In the past year, there has been an increase in new mortgage borrowing, further to the trend that began in early 2018 after two previous years of declines in new mortgage borrowing. The yearly average of new mortgage borrowing on a monthly basis reached a post-2015 high of about NIS 5.35 billion per month in 2019, peaking at NIS 6.7 billion in July (NIS 5.5 billion seasonally adjusted). The increase in new mortgage borrowing since the beginning of the year was mainly influenced by developments in the housing market, led by the increase in first home purchases, particularly new homes. Despite the increase in new mortgage borrowing and a slight increase in the average LTV (loan-to-value) ratio, the ratio of housing credit to GDP in Israel remains low by international comparison (27 percent), and the quality of the banks' mortgage portfolio remains high.
- Since the beginning of 2018, the number of new home purchases increased, and in particular the share of new homes among first home purchases grew. This increase is explained by, among other things, an increase in the number of transactions as part of the "Buyer's Price" program, which reached about 40 percent of total new home purchases in December 2018. Investors' share of home purchases continued to decline moderately.
- Mirroring the developments in the housing market, most of the growth in new mortgage borrowing comes from loans for the purchase of a first home. Thus, loans issued to finance the purchase of a first home comprised about 48.4 percent of all loans issued for residential purposes during the second quarter of 2019, compared to 43.9 percent in the first quarter of 2017.
- In terms of housing loans issued as part of the "Buyer's Price" program, while there was just a moderate increase in total new loan volume, there was a sharp increase in the number of loans (45 percent in three months). This difference is due to the fact that there is a gap between the date a contract is signed as part of a "Buyer's Price" project and the date the mortgage is taken out and payments begin. This is because the purchaser does not have to pay out the full amount of the mortgage upon signing the deal, but must gradually do so as construction progresses until occupancy. This hints that in the next one-to-two years, a further increase in new mortgage borrowing is expected to result from "Buyer's Price" projects as construction progresses on more apartments assigned as part of the project.
- In parallel with the increase in new mortgage borrowing, there was also an increase in the share of mortgages with high financing rates (LTV of between 60 and 75 percent). This was due both to the increasing share of borrowers purchasing a home as part of the Buyer's Price program, who are generally characterized a higher LTV rate than other mortgage borrowers (as “Buyer’s Price” participants are mostly young couples), as shown by Banking Supervision Department data, and due to more lenient capital requirements published by the Banking Supervision Department for loans at such LTV rates.
- Despite the increase in LTV rates, the average LTV rate remains low, at 52 percent. In general, the credit of the banks' housing credit portfolio is good, as shown by other risk indices including a low payment-to-income (PTI) of 26.4 percent on average, near zero loss rates, and more. The high portfolio quality is the result of a series of measures adopted by the Banking Supervision Department over the years, which led in prudential terms to an improvement of the housing credit portfolio on the banks' balance sheets, and in consumer terms to reduced borrower sensitivity to potential changes in the economic environment. The improvement of the banks’ mortgage portfolio is also reflected in stress tests conducted every year in the banking system, which show that the risk in the housing credit portfolio remains lower than in other credit segments, and that its quality has improved in recent years.
- Despite the increase in demand for housing loans, we are seeing a significant decline in the interest rates on such loans (about 0.5 percentage points since the beginning of the year), which makes it easier for mortgage borrowers. This decline is due to the significant decline in long-term interest rates in the economy, which influence the cost of raising sources for the banks in the medium-long term.
- The increase in demand for mortgages was accompanied by an increase in the supply of housing loans by the banks. Thus, some of the banks defined the market as a strategic target for growth, partly due to the convergence of capital ratios that were higher than regulatory capital requirements, a lower risk perception than in other activity segments, and the increased profitability of the segment (despite the decline in interest rates).