The Bank of Israel has issued a strong warning against the recent proposal by the Housing Cabinet to examine the role of banks in setting housing prices. The Bank argues that limiting financial institutions’ oversight within construction loan agreements could severely undermine buyer protections—similar to past scandals with construction companies—and may even lead to rising housing prices and reduced supply. The initiative, led by Prof. Avi Simhon of the National Economic Council, aims to evaluate the banks’ influence within 30 days.

By Dror Neer Kastel, Nadlan Center

The Bank of Israel has spoken out for the first time against the plan proposed by Israel’s Housing Cabinet this past Sunday. As part of the plan, the Cabinet would appointed a team led by Prof. Avi Simhon, head of the National Economic Council, to assess the banks’ role in determining housing prices and the potential impact on market competition. In its statement, the Bank of Israel raised concerns about potential harm to sale guarantees and the risk of a repeat of scandals like the bankruptcy of the Heftsiba Construction Company in 2007, which left many families without homes and sent shock waves throughout the real estate world.

The Bank of Israel is primarily concerned that banks may struggle to fully finance projects or provide sale guarantees if developers drastically reduce apartment prices—even though they are responsible for stepping in should a developer fail. The Bank argues that today’s rising housing prices are primarily driven by increased demand. It also noted that developers’ listing prices often exceed those projected in their initial feasibility reports. According to the Bank, off-plan apartment purchases—where buyers pay before construction begins—carry built-in risk, especially if a developer goes bankrupt or misuses funds.

To support it’s claim, the Bank cited past examples: “This risk has materialized in several cases, such as Kochav Hashomron in the 1980s and Heftsiba in 2007.” At the time of its collapse, Heftsiba was one of Israel’s largest construction firms. Hundreds of families who had purchased apartments off-plan were left without homes and without their money, since no sale guarantees were issued. Many buyers faced years of severe financial hardship as a result.

Following Heftsiba’s collapse, the need to protect buyers’ funds became clear. This led to legislation requiring closed project financing. Under this framework, the financing institution—typically a bank or insurer—provides sale guarantees to buyers, ensures all payments go into a dedicated escrow account, and releases funds to the developer only as construction progresses under supervision.

Bank of Israel: Guarantees and Construction Loans Provide Critical Protection to Buyers

“This mechanism protects buyers in two essential ways,” the Bank explained. “First, it significantly lowers the risk of developer mismanagement, insolvency, and project failure. Second, if the developer does go bankrupt, the financing institution must either return the money to the buyers or step in to complete the project and deliver the apartments.”

They concluded that “this guarantee and financing structure offers tremendous value to Israeli homebuyers. Without this oversight, buyers’ money is hanging by a thread.” Financing entities reduce the likelihood of developer insolvency by requiring credit protections, typically in the form of equity and expected profit margins.

“When projected profits are low, the bank will demand more equity from the developer. To ensure this financial cushion remains, financing agreements give the bank authority to intervene if expected profits fall due to lower revenue, higher costs, or both.”

The Bank warned that the proposed changes could be counterproductive: “Uncontrolled interference in loan agreements—by restricting lenders’ ability to oversee projects—would negatively impact Israel’s housing market. It would likely result in fewer projects and contribute to rising housing prices. To reduce risk, lenders would demand higher developer equity, which would also raise the cost of financing. These factors combined would limit the number of housing starts and push prices even higher. Increased risk of developer bankruptcy could also make mortgages for off-plan buyers more expensive, ultimately hurting the public.”

In the Bank’s view, the newly formed task force should explore a broad range of factors behind non-reductions in pricing—such as land marketing procedures, permit delays, and construction input costs. It stressed that any review of financing terms must still safeguard buyer funds and maintain rigorous oversight over developers under the current closed project financing model.

Task Force to Examine Whether Banks Are Blocking Price Drops

At Sunday’s Housing Cabinet meeting, a decision was made to create a task force led by Prof. Avi Simhon to investigate whether bank practices are preventing apartment prices from falling, despite favorable market conditions. The team’s objective is to examine “whether banks are influencing housing prices—particularly through conditions set in financing agreements with developers—and how this might affect market competition,” according to the official statement.

According to the proposal submitted for approval by the Cabinet, headed by Housing Minister Yitzhak Goldknopf, the team led by Simhon will also include the Director General of the Ministry of Construction and Housing and the Director General of the Ministry of Finance, as well as representatives from the Bank of Israel, the Ministry of Justice, and the Competition Authority. The task force is expected to present its conclusions within 30 days and, if deemed necessary, recommend practical steps.

This is not the first time accusations have been made against the banking sector for hindering price reductions. Officials from the Finance Ministry and the head of the Israel Land Authority, Yanki Quint, have made similar claims in the past. However, this decision marks the first formal action aimed at determining whether the banks are indeed playing a role in keeping rising housing prices in place.