Analysis of the mortgage market for borrowers from the Arab sector, following structural failures in the housing area in this sector

·         The objective of this document is to examine the mortgage market for the Arab sector, and the reasons for the current situation, while relating to the existence of structural failures in the housing field in this sector.  The analysis is based on a database that includes all mortgages issues by the banks between 2010 and 2014.

·         An analysis of the database shows that the rate of mortgages issued to customers from the Arab sector (2 percent of the database) is much lower than their proportion of the population (21.4 percent).  For mixed localities (such as Jerusalem, Haifa and Ramle), the rate of mortgages issued to customers from the Arab sector is about 4 percent, compared to their proportion of the population of those localities, which is about 24 percent.

·         An analysis of the interest rates on the mortgages shows that there is a slight gap, of about 0.1 percentage points, in the interest rates between customers from the Arab sector and those from the Jewish sector in mixed localities.  In contrast, for localities that are not mixed, those in the Arab sector were found to have interest rates about 0.3 percentage points higher than those in the Jewish sector.  This gap is after neutralizing differences in some of the risk characteristics of the borrowers, and it apparently reflects the risk derived from the banks’ difficulty in realizing assets in Arab localities in the event of a borrower’s failure.  In addition, the gap may also reflect gaps in the borrower’s employment stability and other variables that do not exist in the database.

·         Possible explanations of gaps in access to mortgages and in their surplus cost in the Arab localities include:

o   Difficulties in registering the property and in recording it as collateral. The structural failures that exist in the housing field in Arab sector localities, chiefly the lack of registration of ownership of the properties and the difficulty in realizing them, lead to lower access to mortgages for customers from the Arab sector and to an effect on the level of the interest rate;

o   The competitive structure of the housing market field in the Arab sector.  The difficulties in collateralizing and realizing assets led to a situation where some of the banks hardly operated in the housing credit market in the Arab localities, and competition in this market was therefore narrower.  However, in the past decade, the number of bank branches in the Arab localities has grown by about 90 percent.  The increasing business focus of the banks on the Arab localities is acting to increase competition in banking services in the sector.



·         Against the background of these structural difficulties and of the increase in the banks’ focus and activity in the Arab sector, some of the banks have begun offering loans for housing purposes to the Arab sector for long periods (beyond 10 years, and even up to 20 years), without using the property as collateral.  Such loans are characterized by relatively small volumes for individual households, and the interest rate on them is higher than on mortgages, since the loan is unsecured.

·         In order to help increase the supply of housing credit to the Arab sector and improve the terms of loans for borrowers from this sector, government programs to register rights in the Land Registry must be advanced.  This will increase borrowers’ abilities to collateralize their properties, reduce the risk in the loan, and improve the supply and price of credit.  In this context, the program by the government and the Economic Development Authority in the minorities sector (decision number 922 on Economic Development in minority populations from 2016 to 2020) is expected to help customers from the sector take out mortgages in the coming years, since it increases the volume of high density construction on government-owned land in the Arab sector, where home ownership can be registered.​

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