Mortgage Costs Surge Six Times Faster Than Official Inflation Index

A new study by the Taub Center reveals that the actual cost of mortgages in Israel has risen significantly faster than official inflation figures indicate. Researchers calculated an alternative index that measures the real cost of financing a home purchase, finding that the average mortgage interest rate jumped by 52% in 2023 and 42% in 2022. This surge is approximately six times higher than the increase reflected in the official Consumer Price Index (CPI) for the same periods.

The discrepancy arises because Israel's Central Bureau of Statistics (CBS) calculates the housing component of the CPI based on a theoretical "imputed rent" rather than actual mortgage payments. This method, used in many countries including the US since 1999, aims to stabilize the index by excluding volatile housing market fluctuations. However, it means that the actual interest paid by homeowners on their mortgages is not factored into the official inflation measure.

Professors Benjamin Bental and Dr. Levav Shami, who led the research at the Taub Center, developed a supplementary index that considers the average mortgage interest rate multiplied by the average home price. Their findings indicate that during 2022 and 2023, when the Bank of Israel sharply increased interest rates to cool demand, homeowners faced a double blow: rising home prices and significantly higher monthly mortgage repayments.

While the researchers emphasize that their alternative index is not intended to replace the official CPI but rather to provide a more comprehensive understanding of the economic impact on households, their findings could potentially support legislative proposals aimed at easing the burden on mortgage holders. However, Professor Bental stated he does not support certain controversial legislative initiatives that have faced criticism.