Will we see a housing price-drop now that the Covid mortgage holiday is over?
Israeli Borrowers who deferred 2.9 Billion NIS of mortgage payments will have to reface reality.
Out of the million Israelis furloughed or fired after Covid-19 took over our lives in March 2020, almost two hundred thousand households took advantage of the offer made by the banks, acting under orders from the Central Bank, to give borrowers a payment holiday of up to 6 months. In all, 2.9 billion shekels worth of home loans were put on hold, and a further 1.6 billion shekels of consumer loans were deferred.
This holiday – the only holiday many of us have been on this year – is all about over. Borrowers who have not yet utilized this option may still apply until the end of 2020, but for those who have already taken advantage of this break, further deferral will not be available.
Furloughed Israelis receive approximately 70% of their income as unemployment benefits. Since the mortgage payment is on average 30% of one’s income, the break allowed the household to remain financially above the water. Once this is over, there will be thousands of households who will not be able to make ends meet.
The decision made by the central bank to recommend adjourning the vacation is in line with most countries in the world. The U.S.A, UK, Canada, Australia and much of Europe allowed a six-month break, which is not being lengthened despite 2nd waves of the pandemic closing down a lot of the countries’ economies. Only Italy passed legislation, giving an 18 month payment holiday.
The cause for the concern of the central banks is both as a result of consumer awareness and regulatory pressures. When a homeowner takes a break, the loan does not disappear. Nor does the final payment get pushed ahead. It is more like squeezing a sausage balloon. The air remains, but it becomes fatter in another part. Making it more likely to burst. By delaying the payment too many months, the ultimate monthly bill will grow, and incomes need to grow accordingly to be able to make the payments.
No less relevant is the regulatory pressures. The Basel guidelines require the banks to report the debt which is considered high risk, especially when the risk factor of the debt changes during the lifetime of the loan. In Israel, 4.6 billion shekels of consumer debt being redefined as high risk represents some 3% of the total banking system’s consumer debt.
Although much of the work will fall on the banking system to make sure that their loans do not accrue arrears, the Israeli banks, unlike their European counterparts, are not up in arms to extend the payment holiday. The local banking system’s income structure differs from the European one. Whereas abroad, most of the bank’s income is from financial activity – spreads on the interest rates – Israeli banks have an over-proportionate amount of income from operational sources, which we know as bank fees. A revolving loan generates fees; an idle one does not.
Although the holiday is over, banks in Israel have been instructed to do everything possible to avoid repossessions. Whether re-financing, or lengthening the amortization period, they have been told to avoid evicting homeowners at almost all costs. This will prevent an influx of distressed properties onto the market, and bargain seekers will be dismayed.