To Research (Hebrew)- Households that purchased homes after the sharp increase in home prices financed their purchase by significantly increasing the volume of their mortgage, and somewhat increasing their equity.
- Despite the sharp increase in the mortgage, the rate of monthly repayment of the mortgage out of household income did not increase. This development was made possible at the price of significantly extending the repayment period of the mortgage (an extension of 6 years over the past 8 years), and due to the decline in the average interest rate on mortgages and some increase in households’ real income.
- As a result, the ability of households that purchased homes after the price increases to maintain in those years a similar level of consumption to households that purchased homes in earlier years was not affected.
- It can be assumed that the increase in equity used to purchase a home was also made possible due to the sharp increase in the value of financial assets held by the public in the past decade.
A study conducted by Dr. Yoav Friedmann and Dr. Sigal Ribon of the Bank of Israel Research Department, which assessed the changes that have taken place in how home purchases were financed between 2004 and 2011, found that households that purchased homes after the sharp increase in home prices financed their purchase by significantly increasing the volume of their mortgage and somewhat increasing their equity (Table 1).
Table 1: Financing of home purchase*
2004–2006 |
2007–2008 |
2009–2011 |
2009–2011 compared to 2004–2006 | |
Equity (all purchasers, NIS thousand) |
501
(43) |
443
(32) |
575
(48) |
15% |
Equity (mortgage borrowers, NIS thousand) |
356
(34) |
309
(29) |
457
(44) |
28% |
Mortgage borrowers as a percentage of purchasers |
68.4% |
72.1% |
73.9% |
5.5** |
Total home purchase loans (mortgage borrowers, NIS thousand) |
375
(30) |
407
(26) |
557
(45) |
49% |
LTV ratio (mortgage borrowers) |
55.2%
(3.0%) |
60.6%
(2.3%) |
57.5%
(2.9%) |
2.4** |
* Numbers in parentheses—standard deviation.
** Percentage points.
SOURCE: Researchers’ calculations based on Household Expenditure Survey.
The researchers found that, despite the increase in the average mortgage, there was no significant change in the payment to income ratio. This was due to the extension of the mortgage repayment period, the decline in mortgage interest rates, and some increase in the real income of households that purchased homes. This development made it possible for those purchasing homes to maintain private consumption at similar levels to households that purchased homes prior to the price increases. With that, the extension of the mortgage repayment period may influence households’ future disposable income, and therefore may also influence the level of consumption of those who purchased homes (after the price increases) in the future.
The study makes use of data from the Central Bureau of Statistics Household Expenditure Survey for 2004 to 2011 to analyze the changes in how home purchases were financed during that period. The uniqueness of the Household Expenditure Survey is in that it can provide information on the characteristics of the purchasers, the value of the home they purchased, and how it was financed—a unique combination, particularly for the period before 2009.
Based on the survey data, it was also found that between 2004 and 2006, and between 2009 and 2011, there was a slight increase in income among all home purchasers compared to the income of the general population. In addition, relative stability was maintained between the two periods in the average age of home purchasers compared to the general population.
In order to establish the study’s conclusions, and in order to assess the quality of the Household Expenditure Survey data in relation to data on home purchasers, the researchers made various comparisons of Expenditure Survey data and macro data from other sources. The researchers indicate the high correlation between the Expenditure Survey data and figures from the Israel Tax Authority (the “Carmen” real estate prices file) both regarding the average price of home purchase transactions and regarding the distribution by district in which the transactions were made. The researchers also indicate the great similarity, both in level and in rate of change during the studied period, in data on the average mortgage according to the Expenditure Survey and according to Banking Supervision Department survey (for three banks).
Average mortgage, 2003–2011
Household Expenditure Survey data* and Banking Supervision Department figures for three banks
SOURCE: Researchers’ calculations based on Household Expenditure Survey data and Banking Supervision Department figures.