Mortgage rates going up


It’s been a long while coming, interest rates on mortgages have finally started raising from their historic lows. This was bound to happen at some point in time. Surprisingly it came with sharp increases rather than the typical gradual increments that we are accustomed to seeing in interest rates.

There is a very common misconception that the Bank of Israel official monetary policy directly impacts mortgage rates. They don’t. Bank of Israel rates have been unchanged and remain at the historic low of 0.1% as of this writing. This immediately affects only the prime rate (BoI rate + 1.5%) and quite closely the Makam rates (short-term bond index).

All of the other rates are determined by supply and demand and the cost to the banks of lending. To keep it brief, the banks are required to maintain asset reserves for the money that they lend. If the bank is making loans that are linked to inflation, then the bank needs assets that are linked to inflation in order to back them up. The BoI Supervisor of the Banks determines the scope of assets necessary to ensure bank liquidity.

The price of buying the bonds that the banks use as reserve assets has increased. The increase can be attribute to many factors including increased demand and a temporary return to sanity.

The Minstry of Finance's A-Team
The Minstry of Finance’s A-Team

Eventually everything will cycle. Rates go up and down, exchange rates go up and down. Inflation and real estate prices are no more immune to the business cycle. Prices will go down in real terms, but it will have nothing to do with Mr. Kachlon.

Kachlon has lots of plans. My advice to him is to do as little as possible. The only government action necessary is to remove obstacles. This will reduce home prices more than all of his plans together.