Israel's Real Estate Sector Faces Growing Credit Risks Amidst Rising Debt

Israeli real estate developers are increasingly relying on loans to cover escalating construction costs and interest payments, leading to a significant jump in their bank borrowing by 40% over the past year. Bank of Israel Governor Prof. Amir Yaron has expressed concern over the widening gap between credit utilization and actual sales, stating the central bank has tools to intervene if the situation deteriorates.

A potential 'bluff' in the system involves the 20% sectoral credit limit imposed by the Bank of Israel to prevent over-concentration in any single economic sector. This limit, intended to safeguard the financial system, is undermined by artificial distinctions between real estate and financial services lending. Loans for construction projects are categorized under real estate, while loans to financial entities, which often then fund real estate ventures, are placed in a separate category, creating a misleading picture of exposure.

The reliance on loans is particularly pronounced due to low sales and rising costs, pushing developers towards non-bank lenders. However, these non-bank entities themselves raise a substantial portion of their capital from traditional banks. Data from the Capital Markets Authority reveals that by the end of 2025, non-bank lenders held approximately 84 billion shekels in credit, with over 40 billion shekels directed towards the real estate sector, primarily to developers and contractors (29.6 billion shekels) and private individuals for housing loans (10.9 billion shekels).

This complex web of borrowing means that if non-bank lenders default on their obligations to banks, the banking system could face a double blow: direct losses from real estate project loans and indirect losses from the non-bank entities they fund. This situation raises concerns that the intended diversification and protection offered by the sectoral credit limit might be illusory, potentially leaving the public to bear the ultimate cost.

In separate news, the departure of MK Moshe Gafni, former chairman of the Knesset Finance Committee, is expected to pave the way for stalled real estate tax reforms. Gafni had historically blocked measures aimed at regulating investor appetite, particularly concerning taxation. Tax authorities hope for a clearer and fairer tax system, focusing on capital gains and rental income taxes rather than transaction taxes.