Israeli Banks Tighten Real Estate Lending, Business Credit Demand Falls

Israeli banks reported tightening credit spreads in the construction and real estate sectors, as well as for large businesses, during the third quarter of 2026. This tightening occurred alongside a continued decline in demand for business credit, according to a survey of credit officers released by the Bank of Israel. Banks anticipate that the decrease in credit demand within the construction and real estate industries will persist into the fourth quarter.

The tightening of credit terms in real estate and construction was observed for both risky and non-risky credit. This marks an expansion of the tightening compared to the previous quarter's survey, which indicated a worsening of credit spreads for high-risk loans in these sectors, while non-risky credit saw easing across most sectors. Credit spread refers to the additional interest banks charge above a benchmark rate, and its tightening can increase financing costs even if the base interest rate remains unchanged.

The credit landscape varied among different business sizes. While large businesses experienced tightened credit conditions, small, micro, and medium-sized businesses saw an easing of spreads on non-risky credit. These findings highlight that changes in financing terms are influenced by business size, industry, and the perceived risk of a loan.

For households, demand for mortgages remained stable in the third quarter, with no change in housing loan spreads. Banks, however, expect an increase in mortgage demand in the upcoming quarter. Consumer credit demand also stayed steady, contrasting with growth seen in the second quarter and earlier expectations of continued increases. Easing continued in non-risky consumer credit spreads, which banks attributed primarily to competition.

For investors in real estate companies, the combination of reduced credit demand and tighter pricing raises questions about financing costs and the pace of project development. However, the survey does not confirm an actual decrease in loan volumes or the emergence of a credit crunch, as it reflects aggregated bank reports and weighted responses rather than changes in loan amounts. Future projections are also based on respondents' estimates, not yet realized data.