Unlike the American banking system, the Israeli banking system is extremely centralized, with two large banks, Hapoalim Bank and Leumi Bank, and three medium size banks Mizrahi Bank, Discount Bank, and Habenleumi Bank. These 5 banks control basically the whole Israeli banking system while some other small banks have very little market share. (Come to think of it, maybe the United States is not so far away after the TARP scheme)

In reaction to the global economic recession Israel’s central bank governor, Stanley Fisher, cut interest rates from 5.25% to a record low of 0.5% creating a giant housing bubble.(see: Israel’s housing bubble).

“The market is on fire”, said Eti Lengrman, CEO of the mortgage segment of Discount Bank in an interview to the Israeli newspaper THEMARKER in the end of October. “In September alone the size of new mortgages was 3.2 billion NIS, which as an annual pace 30-35 billion NIS that is compared with 25 billion in 2007. The mortgage market reached in 2009 levels we have never seen before.”

Israeli bankers give to reasons to rise in total amount of new mortgages, the first being a growth in the number of mortgages and second being a growth in their size due to the rise in real estate prices. AMG, a mortgage consulting firm noted that the average mortgage rose from 400 thousand NIS in 2008 to over 620 thousand in 2009.

“The interest rates have encouraged people to look for alternatives for putting money in the bank, and houses even if they give only 4% annual return in rent became an alternative.” Said Shuki Burenstein, the CEO of leumi bank in an article published in THEMARKER.

The most popular mortgages are those that are fixed to the prime rate which is the interest rate determined by Israel’s Central Bank plus 1.5%. According to figures published by the Bank of Israel, the adjustable rate mortgages indexed to the prime rate where 65% of mortgages between January and August 2009, compared with less than a third in 2007. Burenstein even stated that up until Stanley Fisher started raising rates a few months back 75% of the mortgages where adjustable rate indexed to the prime rate. (Small reminder- this is the LARGEST BANK IN ISRAEL)

The rates people paid, and are still paying in Israel mortgages in completely ridiculous. With the average rate of and adjustable rate mortgage indexed to the prime just 1.68%!!!!! This fact makes the Israeli economy, and the Israeli banking system in particular sensitive to rate hikes (SEE: the affect of rate hike on Israel’s mortgage market.)

The banks appear not to be too worried about the possible rate hike, repeating the exact same mistakes that American banks did a few years back. “For every 100,000 NIS that a borrower takes on 20 year mortgage he pays 482 NIS if he takes an adjustable rate indexed to the prime, if he takes a fixed rated it will cost him 716 NIS, for a 500,000 NIS mortgage that amounts to 1,170 NIS” (1/8 of Israel’s average monthly salary). A smart customer of ours knows that the rate will one day go up, but in meantime if he can enjoy the low rates, why not? He could always refinance when rates go up. In the last few years the mortgage market has become more sophisticated.” Said Lengerman from Discount Bank. Clearly Israeli bankers have learned nothing from the American experience. (Actually they may have learned something knowing that if everything goes wrong they will be bailed out.)