The current level of interest has not been seen in Israel since 2008, when the global subprime crisis broke out.
This fact may hint at the seriousness of the state of the economy or at least how the Bank of Israel sees it.
However, continuing to raise interest rates in Israel, as necessary a step as it may be, may turn out to have a particularly painful side effect - the worsening of the housing crisis.
The reason is that the high interest rate makes it difficult for the contractors because their risk increases, and because of this they are in no hurry to build.
At the current price level, banks are also reluctant to approve projects with low profitability rates and to provide contractors with banking support.
This combination may result in a reduction in construction starts, and in light of this also in a more limited supply of apartments.
An interest rate that has never been seen before.
Governor of the Bank of Israel Amir Yaron (archive), photo: Oren Ben Hakon
Fear of further increase
The number of housing units that were planned and approved last year by the planning committee and the Israel Land Authority is definitely an achievement that inspires some optimism regarding the level of apartment prices in the coming year.
However, as long as there are no actual construction starts on a sufficiently high scale - apartment prices will continue to rise.
Already in the third quarter of the year, the effect of the interest rate on the pace of construction starts is felt.
The annual rate stands at construction starts of 60-64 thousand housing units, compared to 80 thousand in the first two quarters of 2022. Just to explain the story, according to estimates in the economy sector, about 100 thousand construction starts are needed - about 30 thousand of which to to cover the "deficit" from previous years.
As long as no construction starts - apartment prices will continue to rise.
Rishon Lezion project, photo: Yehoshua Yosef
If in the developed world the increase in interest rates is already giving its signals (for example, in the US apartment prices have started to fall), in Israel the situation is different: the annual rate of increase in apartment prices has already exceeded the 20% mark per year, and there is a fear that it will continue to increase if there are fewer construction starts.
Government intervention is required
The high interest rate also directly affects the rents, which according to estimates will continue to rise.
This is due to the effect of the increase in apartment prices and of course also due to the increase in mortgages.
Because of this, the landlords who pay the mortgage "pass on" the interest rate increase to the tenants.
Even for Israelis who pay a mortgage, the high interest rate is especially suffocating.
It is no longer an addition of tens of individual shekels per month as it was in the beginning.
Since April last year, the average monthly repayment has jumped by almost NIS 1,000 per month.
Those whose monthly expenses on the mortgage reach a high proportion of their total income and did not receive a salary increase this year, may find themselves in a problematic situation with the bank.
Bank of Israel, photo: Oren Ben Hakon
Bottom line, the interest rate increase "pains" for everyone - the mortgage holders, the apartment renters, the young couples who want to buy an apartment and the business owners.
However, it is important to understand that the Bank of Israel has no choice.
Raising the interest rate is considered the most effective tool to reduce inflation.
In order to allow the Bank of Israel to "take its foot off the gas", government intervention is required in the form of freezing the "inflation generators" - electricity rates, water, property taxes, as well as the price of fuel - in the immediate term.
After that, action must be taken to continue removing import barriers and encouraging competition between suppliers of food products and toiletries.
It seems that this is indeed the direction of the new government.
New construction in Be'er Sheva.
The pace is insufficient, photo: Dodo Greenspan
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