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09.01.2011
 
Summary of address by the Deputy Governor of the Bank of Israel today, at an evening workshop in memory of Amnon Ben-Natan at Tel Aviv University
 
The Deputy Governor of the Bank of Israel, Professor Zvi Eckstein, delivered a lecture today on the topic of Monetary Policy and Financial Stability in View of Trends in the Housing Market at an evening workshop at Tel Aviv University in memory of Amnon Ben-Natan. The Deputy Governor began his remarks by addressing the recently published conclusions of the Sheshinski Committee and stating that he supports them. The significance of the committees recommendations, he says, is twofold. One the one hand, they will assure the private developers a significant return beyond the cost of capital, so that investing in the exploitation of these resources for the benefit of the Israeli economy will remain worthwhile. On the other hand, once the extent of the profits becomes clear, the tax rate established will ensure that the return on investor equity will remain within the bounds of accepted economic profitability in the industry and will assure the safeguarding of the publics share. The expected return, according to the committees calculations, will range from 18 percent to 22 percent and will lead to a logical balance between the states share of the proceeds and that of the investors.
The Israeli economic data indicate that the exit from the crisis is continuing: the domestic economy is growing rapidly by the standards of developed countries and the employment data point to significant recovery. In this context, the Deputy Governor stressed that nearly one-third of the increase in employment in 2010 traces to an upturn in the employment of Israelis in the construction industry. Monetary policy in Israel is going through a process of return to normality, whereas interest rates in Europe and the U.S. have remained at the low level to which they had fallen when the crisis was at its worst.
The Deputy Governor stated that in view of the Israeli economys exit from the crisis, it is possible to turn attention to the main lessons of the crisis in respect of monetary policy and financial stability. Thus, policymakers learned that both during a crisis and in the rebound from a crisis, there is room for non-standard monetary policy that includes intervention in the financial markets in order to help reinforce economic stability generally and financial stability specifically. It is against this background, the Deputy Governor explained, that the Bank of Israels intervention in the foreign-currency and housing markets may be analyzed. The foreign-currency intervention is preventing rapid appreciation of the currency and supporting the recovery of Israels export industries.
The Deputy Governor noted with emphasis that many financial crises abroad, and especially the recent one, originated in supervisory failures in housing markets on the background of low interest rates. Housing credit for households in Israel has been rising steeply in the past two years and the average ratio of credit to dwelling value has almost doubled despite the increase in housing prices. Housing prices abroad and in Israel are typified by strong cyclicality and the central banks role in this context is to prevent the formation of a price bubble supported by rapid increase in credit. The Bank of Israel has intervened in a minor way thus far but has the option of adopting an aggressive policy if the continued trend in demand makes this necessary. The Deputy Governor presented data showing that housing prices relative to wage are higher in Israel than in countries such as the UK, Canada, and the U.S., and recommended policy measures in several respects: encouraging private initiative by selling land zoned for building, greater efficiency in the licensing and planning system, and, especially, urban renewal and development that would be reflected, among other things, in the promotion and systematization of clear-and-build programs, budget support for Town Building Plan 38, and planning and development of urbanization processes in the Arab sector.