Mortgage market retreating fast

• Published date: 26 January 2023

The rise in interest rates had an immediate effect on the residential real estate market, and consequently on mortgages as well, and if we look at the past few months some significant changes are visible

1. A year of two halves

Last year began with large monthly jumps in new mortgage lending. The total of new mortgage loans in the first quarter of 2022 was 55% higher than in the first quarter of 2021.

In April last year, however, the Bank of Israel started to raise its interest rate, and things gradually died down. Until June, new mortgage lending each month continued to be higher than in the corresponding month in 2021, but from then on the decline set in. From July onwards, the monthly total was lower than in the corresponding month in 2021, except for September, but that was only because in 2021 the Jewish holiday season fell in that month. By the end of the year, the decline reached 40%.

Since data on mortgages precede all the other data on the real estate market, we still have no information about the number of transactions last month, but reports from the field indicate that the number continues to decline substantially in comparison with 2021, so mortgages have probably declined accordingly.

To what level? As mentioned, in terms of mortgages we have reverted to late 2020 and early 2021, but in terms of transaction numbers we are in a period more like 2018. The reason for the gap is that the average mortgage is currently nearly 40% higher than the average mortgage in 2018. This is one of the most important factors still keeping home prices at their high levels.

2. Despite the interest rates, people are buying dearer homes

Is it possible to draw an economic profile of mortgage borrowers? Bank of Israel figures provide food for thought on that. Let's start with the 80% of the market that consists of home buyers on the free market, not for investment, that is to say, young couples and move-up buyers.

These took mortgage loans averaging NIS 948,000 last month, 12% less than the peak recorded in July 2022, and the lowest figure since May 2021. Investment buyers took mortgage loans averaging NIS 920,000, a much lower figure than the one for last year.

It might be thought that when mortgage loans are lower, this indicates that people are buying cheaper homes and have lower repayments, but that is not what is happening. At the end of 2022, the proportion of home buyers at NIS 3 million and upwards reached 30% of the total of mortgage borrowers. A year...