Bethel Finance: BoI: Home prices to rise moderately

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Bank of Israel research department director Prof. Nathan Sussman believes that home prices will rise moderately this year. At the "Globes" Real Estate Conference today, he said, "The housing market reacts slowly to changes in supply and demand. It takes time to build an apartment, which is why prices respond slowly. When home prices rise, contractors are willing to increase the supply by building more. If the rise in prices slows, contractors' expectations will not be met, and they won't build much, and we'll again have a problem."

On the matter of credit, Zussman said, "Israel's construction industry is characterized by the sale of a large proportion of apartments before they are built. This enables contractors to obtain credit from the buyer, rather than the bank. This is cheaper for contractors, and they prefer this method, which bypasses the problem of bank credit. Afterwards, the contractors go to a bank, which views this credit as risky. The solution to this problem is to adjust expectations to the level of prices and demand. The key is contractors' recognition that home prices won't rise like they did in recent years. If the government's plans results in an increase in supply, this will change expectations, and another adjustment will be necessary.

Mizrahi Tefahot Bank (TASE:MZTF) CEO Eli Yones denies that there is a credit crunch. He said, "All the banks are continuing to give credit, and no bank has reached its credit limit. There are fewer sales because of last year's hype, and it's true that there is less risk-taking." His remarks belied contractors' assertions of a credit crunch. Yones admitted, however, that the cost of credit had risen. A bank's credit limit is 20% of its credit portfolio.

Contractors claims of a credit crunch emerged after the Bank of Israel ordered the banks to raise their credit adequacy ratios. Yones said that, while the banks are still extending credit, they are more cautious and selective than before, in view of the global economic crisis that is threatening to reach Israel.

Yones partly attributed contractors' credit distress to the reduction in credit extended by financial institutions, due to debt settlements and tighter regulations. "All the regulators are right, but they are also marching backwards. The banks could build a system that would maintain the balance of economic growth while complying with international standards," he said.