Daily Israel Report

Bank of Israel Move Could Foil Netanyahu’s Housing Plan

Bank of Israel instructs banks to tighten their financing terms for developers, presenting a problem for PM's cheap housing plan.
By Elad Benari
First Publish: 7/28/2011, 3:43 AM / Last Update: 7/28/2011, 5:08 AM

A move announced on Wednesday by the Bank of Israel could hurt Prime Minister Binyamin Netanyahu’s plan to create affordable housing.

According to the Globes financial newspaper, Bank of Israel has informally but clearly told local banks to tighten their financing terms for real estate developers.

Banking sources told the newspaper that the Bank of Israel instructed the banks to review their real estate portfolios and conduct sensitivity tests on the basis of various scenarios. The instruction was verbal, not written, and the banks were reportedly told to keep it confidential.

The sources added that the Bank of Israel told the banks to examine the consequences to their guarantees and to new projects’ feasibility if home prices fell by 15%.

Some banks, reported Globes, are already feverishly discussing how to comply with the Bank of Israel’s guidelines. The banks are expected to substantially increase their equity demands from developers, their liens, and the cost of credit on loans, in order to comply with the order.

Sources told Globes that one large bank has already decided in principle to reduce new credit for small and mid-sized contractors. Another large bank has reportedly already notified developers that they will have to provide larger equity as a condition for the financing of projects. A third bank is reportedly considering the effect of a 25% drop in home prices on its portfolio and intends to demand equity from developers accordingly.

The Bank of Israel told Globes in response that it gave no order to halt the granting of credit for real estate projects.

If true, however, the new guidelines could frustrate Netanyahu’s housing plan, which he presented on Tuesday in the wake of continuing protests over the high costs of housing in Israel.

The plan included a 50% discount in the price of land, which will be given for the construction of apartments, in “price for tenant” tenders.

In these tenders, contractors will essentially compete for the lowest price to be offered to those purchasing the apartments.  Preference will be given to allocating apartments for young couples, discharged soldiers and national/civilian service graduates.

However, if the reports of the Bank of Israel’s orders are true, developers would have a more difficult time obtaining loans for construction, and thus would be discouraged from participating in a tender which encourages lower prices for tenants.