Bank of Israel Issues Warning on Balloon Loans
The Bank of Israel has raised alarms about the increasing prevalence of balloon loans in the real estate market, which now constitute 15% of new mortgages. This type of loan allows buyers to defer principal repayment until the end of the construction period, with developers covering interest payments during this time. While this arrangement may appear attractive, the central bank warns that it could lead to significant price distortions and increased financial risks for buyers.
Economic Uncertainty and Risks of a Crisis
The central bank's concerns are heightened by the ongoing economic uncertainty in Israel, exacerbated by recent conflicts in the region. The Bank of Israel cautions that buyers who cannot repay their loans at the end of the construction period may face severe financial repercussions, including potential losses of up to 10% of the property value. Additionally, the bank has indicated that a looming economic recession could further strain buyers' ability to meet their debt obligations, which could, in turn, impact the banking sector.
Impact on the Real Estate Sector
Despite these warnings, the Bank of Israel believes the risk of a systemic crisis stemming from balloon loans remains low due to existing restrictions. However, the central bank anticipates a decline in demand for such loans if interest rates continue to rise or if the real estate market cools. The Israeli economy has already been affected by the wars in Gaza and Lebanon, leading to a downward revision of the economic growth forecast from 1.1% to 0.4%. The construction sector is grappling with labor shortages and rising costs, further complicating the situation.
