Real estate pushed business credit to a 16-year high: why this is a warning sign
New data show that business credit jumped by 15% year-on-year, the highest rate since 2010, driven largely by banks. This trend is primarily due to the real estate sector, which requires significant funding to stay afloat amid a sales slowdown. Experts warn of rising financial risks.
For the past two years, bankers have consistently boasted about their growth rates in business lending. The five largest banks have seen double-digit growth in credit provision over the past year, which initially appears positive. However, a deeper analysis reveals that this unusual growth is not necessarily a sign of a thriving economy, but rather a form of 'artificial respiration' for construction and real estate firms.
Meitav's chief economist, Alex Zabezhinsky, analyzed Bank of Israel data and found that the annual growth rate of business credit balances exceeded 15%. This is the highest rate since at least 2010, when records began. While this credit growth acts as an economic engine, it also contributes to inflationary pressures.
Notably, all of this growth originated from banks, which increased their business lending by approximately 25%. "In the decade before the coronavirus, the growth rate never crossed the 10% threshold. Conversely, credit from other sources, such as institutional investors, was negative," Zabezhinsky notes.
Credit growth amid a real estate slump
Behind these record figures lies a complex reality. The bulk of this credit has been directed toward real estate and construction companies struggling with market stagnation and low demand for office space. Unlike in previous years, bank credit is rising while active construction areas are shrinking, increasing risks for both borrowers and lenders.
Bank of Israel findings confirm this: due to falling sales and rising construction costs, banks were forced to increase financial credit for residential projects by 40%—from 49 billion NIS at the end of 2024 to 69 billion NIS by the end of last year. Furthermore, mortgage lending is expected to rise as project delivery dates approach.
Analysts at Midroog warn that if these conditions persist, the profitability of development companies could suffer long-term damage. Zabezhinsky emphasizes that contractors are borrowing to survive, not to expand. "Its contribution to long-term growth may be limited," he explains.
Inflationary pressures and outlook
While this credit surge supports short-term economic activity, it risks fueling inflation. In the past, credit growth to contractors was accompanied by an expansion in construction sites, which is not the case today. "Banks are artificially keeping contractors afloat. If interest rates drop and demand for apartments recovers, the situation will resolve itself. However, if this stagnation continues for more than a year, we will start to see real problems," Zabezhinsky predicts.
Banks are aware of these challenges. Clara Zabregal, manager of the real estate sector at Bank Hapoalim, states that developers are constantly reinventing themselves. She also noted that despite concerns regarding office real estate, there is a recent trend of companies returning to physical offices.
Consumer credit sector
The household credit landscape is quite different. Credit to households (excluding mortgages) grew by about 7%, which is a relatively normal rate. In this segment, banks have stepped back, allowing non-bank entities—such as insurance companies and credit card issuers—to lead the growth.
According to CBS data from May, total revenue across economic sectors is rising, particularly in high-tech (up 20.7% year-on-year). However, the real estate sector recorded a 14% drop in revenue, underscoring the ongoing difficulties in the industry.
