Mortgage Costs Surged Six Times Faster Than Official CPI in 2023, Taub Center Study Shows
A new Taub Center study reveals that actual mortgage financing costs in Israel surged 52% in 2023, outstripping official inflation data that relies on theoretical rent calculations.
The Central Bureau of Statistics (CBS) calculates the housing component in the Consumer Price Index (CPI) based on theoretical rent rather than actual mortgage payments. However, a new study published by the Taub Center reveals that the true cost of financing a home soared at a rate six times faster than the official index in 2023.
The Flaw in the Official Index
According to the researchers, the owner-occupied housing services component, which accounts for about 18% of the CPI, does not measure what homeowners actually pay for their mortgages. Instead, the CBS bases its calculation on imputed rent—a theoretical estimate of what homeowners would pay if they rented their own properties. This method, standard in many countries including the United States and used in Israel since 1999, stabilizes the index and prevents it from spiking when the housing market fluctuates. However, it completely excludes the actual mortgage interest paid by homeowners.
To address this gap, Prof. Benjamin Bental, head of economic policy at the Taub Center, and senior researcher Dr. Labib Shami constructed an alternative complementary index. Instead of imputed rent, they examined the actual cost of housing finance—specifically, the average mortgage interest rate multiplied by the average apartment price. They assigned this new component the exact same weight that the housing component receives in the official CBS index.
A Double Blow to Households
The results of this methodological shift were stark. In 2022 and 2023, as the Bank of Israel aggressively raised interest rates to cool the economy, Bental and Shami found that the average mortgage interest rate surged by 42% and 52% respectively. Consequently, their complementary index showed a spike four to six times higher than the official CPI.
"Households bore the brunt of both rising housing prices and soaring mortgage repayments simultaneously, while high interest rates failed to properly cool the actual real estate market."
While the researchers do not claim that their complementary index should replace the official CPI, they propose it as a vital diagnostic tool for the Bank of Israel to better understand the transmission and impact of its monetary policy decisions.
