## 1. Structural Analysis on Housing Investment and House Prices

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### Overview and main assessment
- The Chilean real estate sector has recently undergone adjustments which have increased risks for the financial sector, but the system remains overall resilient to such risks.
- Baseline expectation: the residential real estate market is expected to modestly recover as past cuts to monetary policy rates gradually spill over to the sector and global financial conditions loosen.
- Supervisory priorities:
  - Monitor real estate risks closely.
  - Close data gaps (commercial real estate price indices).
  - Continue to extend stress test models to capture real estate-specific risk factors.

### Real economy and sectoral size
- Construction sector:
  - Accounts for about 6 percent of nominal GDP.
  - Around 8 percent of total employment.
  - Represents 63 percent of total investment in 2023, of which housing and infrastructure construction represent one-third and two-third, respectively.
- Real estate sector:
  - Contributes about 8 percent of nominal GDP.
  - Accounts for about 1 percent of total employment.
- Pre-pandemic sector performance: stock prices in construction and real estate tracked other sectors before mid-2021, but have lagged since mid-2021.

### Financial sector exposures to real estate
- Mortgage loans account for about 30 percent of banks’ loan portfolios.
- Among locally funded firms, construction and real estate firms represent around 10 percent and 20 percent of commercial loans, respectively.
- Life insurers' exposure to real estate-related investments:
  - Total exposure about 28 percent.
  - 8 percent real estate investment (mostly commercial real estate such as offices and shopping centers).
  - 8 percent leasing.
  - 10 percent for mortgages.
- Most bank loans tied to residential real estate rather than commercial real estate.
- Banks have gradually reduced exposures to construction and real estate firms.

### Channels linking real estate to financial stability
- Direct (partial equilibrium) channels:
  - Increase in Probability of Default (PD) of borrowers related to real estate activities.
  - Increase in Loss Given Default (LGD) due to changes in real estate collateral values.
- Indirect (general equilibrium) channels and feedbacks:
  - Housing wealth effect on consumption.
  - Financial accelerator (net worth) channel on investment.
  - Input-output linkages through intermediate goods demand.
- Annex findings:
  - Annex I: estimated housing wealth effects via the collateral channel in Chile are non-negligible.
  - Annex II: spillovers from construction and real estate to other sectors via input-output linkages are similar to the OECD average.

### Residential real estate: demand, supply, and prices
- Homeownership in Chile is around 60 percent (compared with about 70 percent OECD average).
- Housing supply structure: around two-thirds houses and one-third apartments, with more than half concentrated in Santiago.
- Mortgage usage and public support:
  - Mortgage loans are less frequently used to purchase homes compared to OECD peers.
  - Grants to home buyers nearly 0.5 percent of GDP (data as of 2022 in OECD Affordable Housing Database).
- Post-pandemic dynamics:
  - Stagnated demand has led to excess supply of houses; stock of supply has increased corresponding to 3-4 years’ worth of typical sales, although it has recently begun to slowly decrease.
  - Real house prices have modestly declined and have not recovered to peak levels in 2021.
  - Rent prices have also declined.
  - Cancellation rates: gap between pre-sales (gross sales) and final contracts (net sales) has expanded as cancellation rates have increased.
  - Shift in supply toward higher-end properties; pre-pandemic stronger demand for apartments related to demographic factors including strong immigrant flows.
- Affordability and price indicators:
  - CChC estimate: ratio of house price to annual income is 11.4 as of 2024.
  - Cumulative five-year increases in price-to-income and price-to-rent prior to Q4-2021 were about half the median five-year increase observed in countries that experienced real estate crises.

### Policy measures and public support for housing
- Government measures (highlights):
  - Increased maximum eligible home price from 2,200 UF to 3,000 UF and raised the subsidy from 250 UF to 400 UF (July 2024), with doubled savings requirements to facilitate mortgages with an LTV below 80 percent.
  - Introduced FOGAES, providing partial guarantees for construction loans, focusing on social housing projects.
  - FOGAES Vivienda (until December 2024) offered state-backed guarantees up to 10 percent of the mortgage loan for first homes (up to 4,500 UF).
  - October 2023: introduced a temporary tax benefit for new home purchases via mortgages, applicable from 2024 to 2029.

### Structural analysis and DSGE decomposition
- Model and estimation:
  - A Dynamic Stochastic General Equilibrium (DSGE) model with a housing sector (Iacoviello and Neri 2010) is fitted to Chilean data from 2002Q1 to 2024Q1.
  - Deviations from trend of real housing investment and real house prices are decomposed into contributions from structural shocks, including shocks on mortgage rates.
  - Shock on mortgage rates defined as deviation of nominal mortgage rates from the estimated Taylor rule.
  - The original model's short-term funding rate is replaced by mortgage rates to capture weak connection between monetary policy rates and mortgage (long-term) rates.
- Key analytical finding:
  - The current adjustment in housing investment and house prices can be explained by contributions of shocks on mortgage rates.
  - Changes in the contribution of shocks on mortgage rates from 2021 to 2023 fully explain the declines in housing investment and house prices.

### Baseline outlook and risks
- Baseline: modest market recovery expected as global financial conditions ease and past monetary policy rate cuts feed through to mortgage rates.
- Mortgage rates:
  - Chilean mortgage rates closely comove with long-term interest rates, which depend on both monetary policy rates and global long-term interest rates.
  - Recent mortgage rates remain significantly higher than pre-pandemic levels and have been relatively unaffected so far by recent cuts in monetary policy rates.
- Risk assessment:
  - If risks materialize (e.g., persistently high long-term interest rates, structural shifts in commercial real estate), current financial sector buffers appear broadly adequate to absorb such stresses, including tail risks of a real estate crisis—nonetheless close monitoring is advised.

### Commercial real estate developments
- Office sector:
  - Post-pandemic lack of demand; recent indicators show rental prices rebounding despite low absorption and production.
  - Vacancy rates have stayed mostly elevated in offices and shopping centers since the pandemic; recent declines in vacancy noted for warehouses.
  - Recovery stronger in Class A offices than Class B offices.
  - Downtown Santiago: elevated vacancy and reduced rents following 2019 social unrest; many large firms relocated.
- Shopping centers and warehouses:
  - Shopping centers: moderate pandemic increase in vacancy with recent gradual decreases.
  - Warehouses: vacancy rose from nearly zero; lease prices declined as production outpaced absorption.
  - Real investment funds expect continued decline in office vacancy and continued increase in warehouse (industrial) vacancy.
- Hotels: occupancy rates gradually recovering since the pandemic decline; recovery partly supported by a reduced number of rooms in operation.

### Housing loans and borrower profiles
- Loan characteristics:
  - Most housing loans are fixed-rate (in real terms), with maturities of 20 to 30 years.
  - Average mortgage maturity historically approximately 25 years.
  - LTV ratios around 80 percent; distribution concentrated around 80 percent.
  - Mortgage repayments denominated in UF (inflation-indexed unit of account).
- Interest-rate structure (as of 2023):
  - Mixed-rate loans (fixed for first five years, then variable) represent about 10 percent of the mortgage debt stock.
  - Variable-rate loans comprise 3 percent of the total housing loan stock.
- Risk and borrower composition:
  - LTV around 80 percent considered threshold for non-high LTV by rule of thumb; LTVs have remained stable.
  - Share of high-income borrowers in mortgage distribution in Chile is significantly higher than the OECD average.
  - Mortgage loans operate under full recourse system.
- Affordability evolution:
  - Under the same level of mortgage rates, financial burdens for borrowers are significantly higher than 10 years ago because of higher house price levels.
  - CChC estimates: financial burden and required household income for same type of houses, assuming a 20 percent down payment, nearly doubled from October 2019 to June 2024.
  - OECD (as of 2017): median mortgage burden and rent burden as shares of disposable income were, respectively, 15 and 24 percent.

### Credit growth and lending standards
- Since 2023:
  - Nominal credit growth to the construction sector nearly zero.
  - Real estate sector credit growth gradually declined, reaching zero.
- Bank credit surveys:
  - Banks tightened credit approval standards due to declining creditworthiness of construction and real estate firms.
  - Banks report weak demand, consistent with downward trends in building permits for residential, industrial, and office projects.
- BCCh (2024) notes the recent decrease or negative margin between rental yield and mortgage rates could contribute to weak demand.

### Real Estate Investment Fund sector
- Sector size limited but trending upward.
- End-2023: investments by funds in the commercial real estate sector accounted for 11 percent of total monitored office properties (surface area data from CBRE).
- End-2023: investments by funds accounted for 25 percent of industrial properties (surface area data from CBRE).
- Funds becoming more exposed to infrastructures such as data centers.
- Some funds face financial stress due to valuation losses, but small sector size makes systemic risk unlikely.
- Note: a REIT does not exist in Chile; foreign investor participation in funds nearly zero (according to ACAFI).

### Credit risk — mortgage borrowers and NPLs
- Household-debt-to-GDP and mortgage debt-to-GDP ratios have stabilized since the pandemic at the aggregate level.
- Micro-level indicators: household leverage and financial burdens appear to be improving, though heterogeneity exists and some borrowers exhibit high debt.
- Historical unsecured financing patterns:
  - During 2012-13, about 16 percent on average of mortgage loans was coupled with unsecured consumer loans to finance down payments; fraction decreased from 21 percent to 14 percent over the referenced sample.
  - Unsecured loans historically averaged about 10 percent of total mortgage loans with average monthly payments around 80 percent of mortgage payments and a typical term to maturity of about five years.
  - Private banks report this financing behavior has basically disappeared.
- NPL ratios:
  - Declined after the GFC and further during the pandemic (due to increased household liquidity from pension fund withdrawals).
  - Since 2022 these ratios have risen again and approach pre-pandemic levels.

### Creditworthiness of construction and real estate firms
- Since the pandemic:
  - Liquidity ratios and financial leverage of publicly listed construction firms appear to have worsened.
  - Publicly listed real estate firms’ liquidity and leverage have remained relatively stable.
- 2023: smaller firms face more challenging conditions—lower profitability and liquidity ratios—relative to publicly listed firms.
- Compared to regional peers, Chilean construction and real estate firms show lower profitability, lower liquidity ratios, and higher leverage.
- Some developers have begun renting out inventories until buyers emerge.

### NPL trends, collateral values, and LGD risk
- Non-performing loan ratios in construction and real estate sectors have recently been rising.
- Collateral effects:
  - Real estate value declines can raise credit costs via higher LGDs.
  - Housing loans primarily backed by residential properties; real estate assets used as collateral for commercial loans, notably SMEs.
  - Historical experience elsewhere: residential/commercial prices can take a decade or more to return to pre-crisis levels.

### Preparedness of the financial sector — banks
- NPL provision coverage and collateralization:
  - NPL provision coverage for housing loans and commercial loans around pre-pandemic levels at the aggregate level.
  - Banks accumulated additional provisions during the pandemic when NPL ratios were low; current provision levels similar to pre-pandemic levels.
  - Banks with lower pre-pandemic provision coverage have improved coverage since then.
  - For mortgage loans, 94 percent of mortgage loans are concentrated in domestic systemically important banks (D-SIBs).
  - NPL provision coverage for real estate firms has recently declined faster than for total commercial loans, while coverage for construction firms appears to have increased.
  - Authorities indicate loans are conservatively collateralized; banks have recently accumulated more collaterals rather than further provisions.
- Capital ratios and buffers:
  - Banks’ capital adequacy ratios have risen significantly since the pandemic due to Basel III implementation.
  - Capital buffers (capital ratios minus capital requirements) have increased, reaching approximately 5-6 percent.
  - Banks with lower capital buffers are primarily D-SIBs, partly due to higher capital requirements.
  - Historical declines in capital ratios during GFC-type scenarios in the US, Europe, and Japan range from 2-5 percent; the 5-6 percent buffer can be considered adequate.
- Bank stress test findings (BCCh top-down):
  - Collateral valuations reflect appraisals at loan origination and do not include housing price increases of the last decade.
  - A 20 percent drop in house prices would increase provision requirements by 0.33 percent of banks’ risk-weighted assets (decline in capital ratios by 0.33 percent).
  - A 30 percent decrease in market collateral values for commercial loans to real estate and construction sectors would increase provision requirements by 0.26 percent of risk-weighted assets.
  - About 90 percent of commercial loan exposures related to real estate is covered by real estate collaterals, compared with 40 percent coverage for other sectors.
  - Vast majority of mortgages have LTV ratios of less than 80 percent.

### Preparedness of the financial sector — life insurers
- Capital buffers and leverage:
  - Life insurers’ capital buffers have been stable and comfortably above regulatory requirements; financial leverage has remained below the regulatory maximum of 20.
  - Exposures to real estate investment vary significantly; most insurers with high exposures are among the top eight insurers by asset size.
  - The top eight insurers tend to have lower capital buffers and higher leverage.
- Stress testing and valuation:
  - Book values of real estate investments are significantly lower than current market values due to regulatory valuation methods reflecting appraisals at the time of investment.
  - CMF stress tests assuming drops in real estate prices between 25 and 30 percent historically did not raise significant concerns.
  - December 2022 exercise with similar magnitude confirmed insurers could withstand shocks from real estate.
- Monitoring implication:
  - Close monitoring of major insurers’ investment portfolios is warranted given higher exposures, lower capital buffers, and higher leverage of top insurers.

### Regulatory and monitoring framework; stress testing gaps
- Bank supervision and stress testing:
  - Regulations governing banks on real estate-related loans are comprehensive; the CMF regularly conducts supervisory stress testing exercises focusing on capital requirements and loan loss provisions.
  - Basel III regulations for risk-weighted assets implemented.
  - Chile’s provisioning structure is a forward-looking system set by domestic GAAP.
  - Most loans are non-endorsable mortgages, not subject to explicit LTV or DTI limits; LTV ratios cluster around 80 percent due to January 2016 regulatory change linking mortgage loan loss provisions to LTV ratios.
  - CMF develops stress scenarios for ICAAP, including adjustments to house prices (a 40 percent decline in the latest stress test).
- Identified top-down model gaps:
  - Current top-down bank stress tests do not specifically target commercial real estate crises; commercial real estate price scenarios appear excluded due to data gaps.
  - Real estate-related risk factors are not utilized to estimate credit costs for commercial loans in the top-down model.
  - Impact of collateral value fluctuations on LGDs not explicitly implemented in current housing loan loss module.
- Recommendation for top-down model enhancements:
  - Incorporate real estate sector variables as risk factors for commercial loans.
  - Model impact of collateral value fluctuations on credit costs, including explicit links from collateral values to LGDs.
  - Address data gaps in commercial real estate price indices.

### Policy and supervisory recommendations (summarized)
- Supervisors should:
  - Monitor risks closely, including commercial real estate segments.
  - Close key data gaps (notably commercial real estate price indices).
  - Continue to enhance stress test models to comprehensively capture real estate-specific risk factors.
- Authorities should examine:
  - Adequacy of NPL provision coverage and collateral coverages for loans to construction and real estate firms.
  - Life insurers’ portfolio concentration in weak segments, such as offices.
  - Direct evaluation of banks’ resilience to significant stress from a pronounced downturn in the real estate sector.
  - Proceed with establishing a consolidated debtor registry.

### Annex I — Housing wealth effects (DSGE model results)
- Methodology:
  - Estimated DSGE model (Iacoviello and Neri 2010) calibrated and estimated with Chilean data (2002Q1 to 2024Q1).
  - Reduced-form regressions: regress percentage changes (log differences) in aggregate consumption on lagged percentage changes in real house prices.
- Key quantitative results:
  - Regression of consumption growth on lagged growth in housing wealth (model with collateral effects): coefficient = 0.224.
  - Regression from model without collateral effects: coefficient = 0.185.
  - Implied collateral effect (difference): 0.038.
- Interpretation:
  - Simulated coefficient 0.224 falls within the 90 percent confidence interval of the analogous estimate from actual data.
  - The difference of 0.038 implies the existence of non-negligible collateral effects in housing wealth effects.

### Box on DSGE model and parameterization (highlights)
- Features:
  - Multi-sector structure (housing and non-housing goods), financing frictions within household sector, nominal rigidities, comprehensive shocks including housing preference shocks.
- Calibration and estimation details:
  - Discount factor in original paper: 0.9925 (literature range 0.9829-0.9997).
  - Capital share set as 0.33 (literature range 0.33-0.34).
  - Key parameter—LTV ratio for impatient households—set at 0.8.
  - Impact of past shocks on mortgage rates robust to higher LTV limits (0.8-0.9).
  - Estimation sample: 2002Q1 to 2024Q1.
  - Ten observable variables used for estimation.
  - Key estimated parameter: share of labor income accruing to credit-constrained agents ≈ 30 percent.

### Annex II — Input-output linkages and inter-sectoral spillovers
- Sectoral characteristics:
  - Construction sector: higher labor share than other industries.
  - Real estate sector: low labor share but high gross operating surplus.
- Supply linkages:
  - Domestic and foreign manufacturing supply domestic construction sector.
  - Domestic financial sector and construction sector provide inputs to domestic real estate sector.
  - Business services supply inputs to both construction and real estate sectors.
- Spillover effects:
  - Construction: one-unit increase in production mainly increases production in manufacturing and business services; spillover to domestic manufacturers moderately smaller than regional peers but comparable to OECD average.
  - Real estate: one-unit increase in production mainly raises production in construction sector; spillover to construction is larger than that of regional and OECD peers.
  - Domestic spillover ratios in Chile are similar to regional peers but higher than OECD peers.

*Source: sipea2025011 - 1. Structural Analysis on Housing Investment and House Prices (January 16, 2025).*

### 1. Structural Analysis on Housing Investment and House Prices ________________________ 7

### 1. Structural Analysis on Housing Investment and House Prices

### Overview and main assessment
- The Chilean real estate sector has recently undergone adjustments which have increased risks for the financial sector, but the system remains overall resilient to such risks.
- Baseline expectation: the residential real estate market is expected to modestly recover as past cuts to monetary policy rates gradually spill over to the sector and global financial conditions loosen.
- Supervisory priorities highlighted:
  - Monitor real estate risks closely.
  - Close data gaps (commercial real estate price indices).
  - Continue to extend stress test models to capture real estate-specific risk factors.

### Real economy and sectoral size
- Construction sector:
  - Accounts for about 6 percent of nominal GDP.
  - Around 8 percent of total employment.
  - Represents 63 percent of total investment in 2023, of which housing and infrastructure construction represent one-third and two-third, respectively.
- Real estate sector:
  - Contributes about 8 percent of nominal GDP.
  - Accounts for about 1 percent of total employment.
- Pre-pandemic sector performance: stock prices in construction and real estate tracked other sectors before mid-2021, but have lagged since mid-2021.

### Financial sector exposures to real estate
- Mortgage loans account for about 30 percent of banks’ loan portfolios.
- Among locally funded firms, construction and real estate firms represent around 10 percent and 20 percent of commercial loans, respectively.
- Life insurers' exposure to real estate-related investments:
  - Total exposure about 28 percent.
  - 8 percent real estate investment (mostly commercial real estate such as offices and shopping centers).
  - 8 percent leasing.
  - 10 percent for mortgages.
- Most bank loans tied to residential real estate rather than commercial real estate.
- Banks have gradually reduced exposures to construction and real estate firms.

### Channels linking real estate to financial stability
- Direct (partial equilibrium) channels:
  - Increase in Probability of Default (PD) of borrowers related to real estate activities.
  - Increase in Loss Given Default (LGD) due to changes in real estate collateral values.
- Indirect (general equilibrium) channels and feedbacks:
  - Housing wealth effect on consumption.
  - Financial accelerator (net worth) channel on investment.
  - Input-output linkages through intermediate goods demand.
- Annex findings:
  - Annex I: estimated housing wealth effects via the collateral channel in Chile are non-negligible.
  - Annex II: spillovers from construction and real estate to other sectors via input-output linkages are similar to the OECD average.

### Residential real estate: demand, supply, and prices
- Homeownership in Chile is around 60 percent (compared with about 70 percent OECD average).
- Housing supply structure: around two-thirds houses and one-third apartments, with more than half concentrated in Santiago.
- Mortgage usage and public support:
  - Mortgage loans are less frequently used to purchase homes compared to OECD peers.
  - Grants to home buyers nearly 0.5 percent of GDP (data as of 2022 in OECD Affordable Housing Database).
- Post-pandemic dynamics:
  - Stagnated demand has led to excess supply of houses; stock of supply has increased corresponding to 3-4 years’ worth of typical sales, although it has recently begun to slowly decrease.
  - House price dynamics: (real) house prices have modestly declined and have not recovered to peak levels in 2021.
  - Rent prices have also declined, so recovery of demand could take time.
  - Cancellation rates: gap between pre-sales (gross sales) and final contracts (net sales) has expanded as cancellation rates have increased.
  - Shift in supply toward higher-end properties; pre-pandemic stronger demand for apartments related to demographic factors including strong immigrant flows.
- Affordability and price indicators:
  - Chilean Chamber of Construction (CChC) estimate: ratio of house price to annual income is 11.4 as of 2024.
  - Real house prices and misalignment measures (price-to-income and price-to-rent) increased until the pandemic and have since moderated/stabilized.
  - Cumulative five-year increases in price-to-income and price-to-rent prior to Q4-2021 were about half the median five-year increase observed in countries that experienced real estate crises.

### Policy measures and public support for housing
- Housing subsidy and guarantee measures:
  - Government increased maximum eligible home price from 2,200 UF to 3,000 UF and raised the subsidy from 250 UF to 400 UF (July 2024), with doubled savings requirements to facilitate mortgages with an LTV below 80 percent.
  - Introduced FOGAES, providing partial guarantees for construction loans, focusing on social housing projects.
  - FOGAES Vivienda (until December 2024) offered state-backed guarantees up to 10 percent of the mortgage loan for first homes (up to 4,500 UF), reducing provisioning costs for financial institutions.
  - In October 2023, introduced a temporary tax benefit for new home purchases via mortgages, applicable from 2024 to 2029.

### Structural analysis and DSGE decomposition
- Model and estimation:
  - A Dynamic Stochastic General Equilibrium (DSGE) model with a housing sector (Iacoviello and Neri 2010) is fitted to Chilean data from 2002Q1 to 2024Q1.
  - Deviations from trend of real housing investment and real house prices are decomposed into contributions from structural shocks, including shocks on mortgage rates.
  - The shock on mortgage rates is defined as the deviation of nominal mortgage rates from the estimated Taylor rule (captures mortgage-rate movements exogenous to domestic macroeconomic conditions).
  - The original model's short-term funding rate is replaced by mortgage rates in this estimation to capture weak connection between monetary policy rates and mortgage (long-term) rates.
- Key analytical finding:
  - The current adjustment in housing investment and house prices can be explained by contributions of shocks on mortgage rates.
  - Changes in the contribution of shocks on mortgage rates from 2021 to 2023 fully explain the declines in housing investment and house prices.

### Baseline outlook and risks
- Baseline: modest market recovery expected as global financial conditions ease and past monetary policy rate cuts feed through to mortgage rates.
- Mortgage rates:
  - Chilean mortgage rates closely comove with long-term interest rates, which depend on both monetary policy rates and global long-term interest rates.
  - Recent mortgage rates remain significantly higher than pre-pandemic levels and have been relatively unaffected so far by recent cuts in monetary policy rates.
- If risks materialize (e.g., persistently high long-term interest rates, structural shifts in commercial real estate), current financial sector buffers appear broadly adequate to absorb such stresses, including tail risks of a real estate crisis—nonetheless close monitoring is advised.

### Commercial real estate developments
- Office sector:
  - Post-pandemic lack of demand; recent indicators show rental prices rebounding despite low absorption and production.
  - Vacancy rates have stayed mostly elevated in offices and shopping centers since the pandemic; recent declines in vacancy noted for warehouses.
  - Recovery stronger in Class A offices than Class B offices.
  - Geographic variation: downtown Santiago has experienced elevated vacancy and reduced rents following 2019 social unrest; many large firms relocated.
- Shopping centers and warehouses:
  - Shopping centers: moderate pandemic increase in vacancy with recent gradual decreases; some dynamism present.
  - Warehouses: vacancy rose from nearly zero (reflecting e-commerce demand); lease prices declined as production outpaced absorption.
  - Real investment funds expect continued decline in office vacancy and continued increase in warehouse (industrial) vacancy.
- Hotels: occupancy rates gradually recovering since the pandemic decline; recovery partly supported by a reduced number of rooms in operation.

### Housing loans and borrower profiles
- Loan characteristics:
  - Most housing loans are fixed-rate (in real terms), with maturities of 20 to 30 years.
  - Average mortgage maturity historically approximately 25 years.
  - Loan-to-value (LTV) ratios around 80 percent; distribution concentrated around 80 percent.
  - Mortgage repayments denominated in UF (inflation-indexed unit of account).
- Interest-rate structure of mortgage debt (as of 2023):
  - Mixed-rate loans (fixed for first five years, then variable) represent about 10 percent of the mortgage debt stock.
  - Variable-rate loans comprise 3 percent of the total housing loan stock.
- Risk and borrower composition:
  - LTV around 80 percent considered threshold for non-high LTV by rule of thumb; LTVs have remained stable.
  - Share of high-income borrowers in mortgage distribution in Chile is significantly higher than the OECD average.
  - Mortgage loans operate under full recourse system (creditors can seek remaining balance from borrower’s other assets if foreclosure proceeds are insufficient).
- Affordability evolution:
  - Under the same level of mortgage rates, financial burdens for borrowers are significantly higher than 10 years ago because of higher house price levels.
  - CChC estimates: financial burden and required household income for same type of houses, assuming a 20 percent down payment, nearly doubled from October 2019 to June 2024.
  - OECD Affordable Housing Database (as of 2017): median mortgage burden and rent burden as shares of disposable income were, respectively, 15 and 24 percent.

### Credit growth and lending standards
- Housing loan growth is at a historical low amid elevated mortgage rates.
- Bank credit surveys indicate weak demand driven by high borrowing costs as primary factor affecting subdued credit growth.
- Credit standards have tightened slightly, indicating a modest decline in borrower creditworthiness.
- The BCCh (2024) notes the recent decrease or negative margin between rental yield and mortgage rates could contribute to weak demand.

### Policy and supervisory recommendations (implicit and explicit)
- Supervisors should:
  - Monitor risks closely, including commercial real estate segments.
  - Close key data gaps (notably commercial real estate price indices).
  - Continue to enhance stress test models to comprehensively capture real estate-specific risk factors.
- Authorities have implemented targeted housing support programs (subsidies, guarantees, tax benefits) to support demand and reduce provisioning costs for financial institutions.

*Source: sipea2025011 - 1. Structural Analysis on Housing Investment and House Prices (January 16, 2025).*

### 13.      The growth of credit to construction and real estate firms has stagnated amid

### 13.      The growth of credit to construction and real estate firms has stagnated amid

### Credit growth and lending standards
- Since 2023, amid declining monetary policy rates, nominal credit growth to the construction sector has been nearly zero, while the real estate sector has experienced a gradual decline, reaching zero.
- Bank credit surveys report:
  - Banks have tightened credit approval standards due to declining creditworthiness of construction and real estate firms.
  - Banks report weak demand from these sectors, consistent with real economy data showing downward trends in building permits for residential, industrial, and office projects.
- Loans to construction firms tend to be shorter than those to real estate developers; real estate developers typically use bank loans to finance building costs and own funds to invest in land.

### Real Estate Investment Fund sector
- The size of the real estate investment fund sector remains limited, although it has trended upward.
- At the aggregate level, funds invest across office, commercial, industrial, and residential properties; at the individual fund level, investments tend to focus heavily on specific sectors.
- As of the end of 2023:
  - Investments by funds in the commercial real estate sector accounted for 11 percent of total monitored office properties (based on surface area data from CBRE).
  - Investments by funds accounted for 25 percent of industrial properties (based on surface area data from CBRE).
- Funds are becoming more exposed to infrastructures such as data centers.
- Some real estate investment funds face financial stress due to valuation losses, but the relatively small size of the sector indicates these losses are unlikely to pose a systemic risk.
- Additional contextual notes from the source:
  - A real estate investment trust (REIT) does not exist in Chile.
  - Foreign investor participation in Chilean real estate investment funds is nearly zero, according to ACAFI.
  - A limited number of closed-ended real estate investment funds have initial terms scheduled to expire during 2024 and 2025; internal regulations provide time to liquidate assets to avoid losses.

### Credit risk — mortgage borrowers and NPLs
- Mortgage borrower indebtedness:
  - Household-debt-to-GDP and mortgage debt-to-GDP ratios have stabilized since the pandemic at the aggregate level.
  - Micro-level indicators suggest household leverage and financial burdens appear to be improving, though heterogeneity exists and some borrowers exhibit high levels of debt.
- Historical patterns and vulnerabilities:
  - During 2012-13, about 16 percent on average of mortgage loans was coupled with unsecured consumer loans to finance down payments; this fraction decreased from 21 percent to 14 percent over the sample period referenced.
  - Unsecured loans historically averaged about 10 percent of total mortgage loans and had average monthly payments around 80 percent of mortgage payments, with a typical term to maturity of about five years.
  - Private banks report this financing behavior has basically disappeared at present.
- NPL ratios in housing loans:
  - NPL ratios declined after the GFC and further during the pandemic (due to increased household liquidity from pension fund withdrawals), but since 2022 these ratios have risen again and approach pre-pandemic levels, consistent with normalization of household liquidity.

### Creditworthiness of construction and real estate firms
- Since the pandemic:
  - Liquidity ratios and financial leverage of publicly listed construction firms appear to have worsened.
  - Publicly listed real estate firms’ liquidity and leverage have remained relatively stable.
- Firm-size differences:
  - In 2023, smaller firms tend to face more challenging business conditions, characterized by lower profitability and liquidity ratios, relative to publicly listed (large) firms.
- Regional comparison:
  - Compared to regional peers, both construction and real estate firms in Chile show lower profitability, lower liquidity ratios, and higher leverage.
- Sector behaviors to alleviate pressures:
  - Some real estate developers have begun renting out properties (inventories) until they find buyers.

### NPL trends in construction and real estate
- Non-performing loan ratios in the construction and real estate sectors have recently been rising.
- Construction sector business confidence has shown a modest rebound toward neutral levels, potentially because many projects have recently been completed, alleviating liquidity pressures for construction firms while increasing stresses for real estate developers.
- The government FOGAES program (introduced April 2023 and running until December 2024) provides partial guarantees for loans to construction firms, which may have eased access to loans.

### Collateral values and loss given default risk
- Real estate value changes can lead to higher credit costs through declines in collateral values.
- Housing loans are primarily backed by residential properties; real estate assets are also used as collateral for commercial loans, particularly for SMEs.
- Historical experience elsewhere indicates that residential/commercial prices can take a decade or more to return to pre-crisis levels, implying meaningful risk of higher Loss Given Defaults if collateral values decline.

### Risk scenarios
- Key scenario: Persistently high long-term interest rates and stagnation in the office sector could exacerbate challenges in residential and commercial real estate markets, with potential spillovers to construction and real estate firms.
- Mechanisms and consequences:
  - Monetary policy rate cuts do not always lower long-term interest rates, especially when global interest rates remain high.
  - Prolonged elevated long-term rates could weaken creditworthiness of borrowers in construction and real estate and delay construction activity recovery.
  - Structural weak demand for offices could have lasting negative impacts on life insurers’ investment portfolios.
- Policy/monitoring implication:
  - Closely monitor adequacy of NPL provision and collateral coverages for real estate-related loans and the concentration of life insurers’ portfolios in underperforming segments such as offices.
- Additional contextual note:
  - Foreign investor spillovers appear contained due to low foreign participation in Chilean real estate, though statistics on foreign investment participation are not available.

### Preparedness of the financial sector — banks
- NPL provision coverage and collateralization:
  - NPL provision coverage for housing loans and commercial loans is around pre-pandemic levels at the aggregate level.
  - Banks accumulated additional provisions during the pandemic when NPL ratios were low; current provision levels are similar to pre-pandemic levels.
  - Banks with lower pre-pandemic provision coverage have improved coverage since then.
  - For mortgage loans, a mitigating factor is their concentration in domestic systemically important banks (D-SIBs), which account for 94 percent of mortgage loans (higher than their share in commercial and consumer loans at 85 percent and 83 percent, respectively).
  - NPL provision coverage for real estate firms has recently declined faster than for total commercial loans, while coverage for construction firms appears to have increased.
  - Authorities indicate these loans are conservatively collateralized, and banks have recently accumulated more collaterals rather than further provisions.
- Capital ratios and buffers:
  - Banks’ capital adequacy ratios have risen significantly since the pandemic, largely due to steady implementation of Basel III capital requirements.
  - Capital buffers (capital ratios minus capital requirements) have increased, reaching approximately 5-6 percent.
  - Banks with lower capital buffers are primarily D-SIBs, partly due to higher capital requirements.
  - Given that declines in capital ratios during GFC-type scenarios in the US, Europe, and Japan range from 2-5 percent, which is close to the decline in capital ratio in the BCCh’s stress test, the 5-6 percent buffer can be considered adequate.
- Bank stress test findings:
  - The BCCh’s top-down exercise suggests even a substantial decline in real estate prices would not significantly harm bank solvency because collateral valuations reflect appraisals at loan origination and do not include the housing price increases of the last decade.
  - Specific stress-test metric estimates:
    - A 20 percent drop in house prices would increase provision requirements by 0.33 percent of banks’ risk-weighted assets (i.e., a decline in capital ratios by 0.33 percent).
    - A 30 percent decrease in market collateral values for commercial loans to real estate and construction sectors would increase provision requirements by 0.26 percent of the risk-weighted assets.
  - About 90 percent of commercial loan exposures related to real estate is covered by real estate collaterals, compared with 40 percent coverage for other sectors.
  - The vast majority of mortgages have LTV ratios of less than 80 percent; collateral valuations are conservative, based on values at the time of granting the loan.

### Preparedness of the financial sector — life insurers
- Capital buffers and leverage:
  - Life insurers’ capital buffers have been stable and comfortably above regulatory requirements; financial leverage has remained below the regulatory maximum of 20.
  - Exposures to real estate investment vary significantly; most insurers with high exposures are among the top eight insurers by asset size.
  - The top eight insurers tend to have lower capital buffers and higher leverage.
- Stress testing and valuation:
  - Book values of real estate investments are significantly lower than current market values due to regulatory valuation methods reflecting appraisals at the time of investment.
  - CMF stress tests assuming drops in real estate prices between 25 and 30 percent historically did not raise significant concerns; a December 2022 exercise with similar magnitude confirmed insurers could withstand shocks from real estate.
- Monitoring implication:
  - Given higher exposures, lower capital buffers, and higher leverage of top insurers, close monitoring of major insurers’ investment portfolios and their impact on financial soundness is warranted.

### Regulatory and monitoring framework
- Bank supervision and stress testing:
  - Regulations governing banks on real estate-related loans are comprehensive; the CMF regularly conducts supervisory stress testing exercises focusing on capital requirements and loan loss provisions.
  - Basel III regulations for risk-weighted assets have been implemented; estimates of PDs depend on banks’ models and judgments.
  - Chile’s provisioning structure is a forward-looking system set by domestic GAAP.
  - Most loans are non-endorsable mortgages, which are not subject to explicit LTV or DTI limits; however, LTV ratios cluster around 80 percent due to a January 2016 regulatory change linking mortgage loan loss provisions to LTV ratios (establishing an implicit 80 percent LTV limit).
  - The CMF develops stress scenarios for ICAAP, including adjustments to house prices (a 40 percent decline in the latest stress test), and uses both bottom-up and top-down models to assess impacts.
- Risk-weighting and provisioning details:
  - Credit risk-weighted assets for business loans use the simplified standard method under Basel III.
  - For housing loans, risk weights generally increase with LTV ratio and with the number of mortgages a borrower holds; some loans follow the Basel III standard model.
- Historical regulatory effects:
  - The January 2016 regulatory change led to a 9.8 percent decrease in LTV ratio for the median debtor and an increase in loan loss provisions (relative to mortgage loans) from 0.7 to 0.9 percent between 2014-16.

*Source: IMF Selected Issues Paper — sipea2025011.*

### 26.      Chilean life insurers’ real estate investments are constrained by specific investment

### 26.      Chilean life insurers’ real estate investments are constrained by specific investment limits and the CMF conducts supervisory stress testing exercises

### Investment limits and supervisory reporting
- Domestic real estate exposure limit for Chilean life insurers: 25 percent of technical provisions and regulatory (risk) capital.
- Within domestic real estate limit:
  - Domestic residential real estate cap: 5 percent of technical provisions and regulatory capital.
  - Domestic non-residential real estate cap: 5 percent of technical provisions and regulatory capital.
  - Property valuation required at the time of acquisition.
- Foreign real estate investment limit: 3 percent.
- Mortgage loan exposure limit: 30 percent of technical provisions and regulatory capital (OECD 2015).
- Regulatory guidance / capital treatment:
  - Methodological documents on risk-based capital suggest insurers should establish a capital requirement for market risk related to real estate investments equal to market values of the real estate multiplied by a factor of 20 percent (also used by CMF when requesting bottom-up stress tests from life insurers).
- Reporting and monitoring:
  - July 2024: CMF published a regulation enforcing reporting requirements for investments made by insurance companies, including those related to real estate, to allow deeper monitoring of life insurers’ exposures and risks.

### CMF stress testing for life insurers and recent exercises
- CMF conducts regular stress testing exercises examining real estate sector resilience.
- December 2022 stress exercise:
  - Covered stress credit risk scenarios for mortgage loans, including a drop in collateral values.
  - Included a market risk stress scenario for real estate investment and leasing exposures (stressing real estate prices in accordance with standard global magnitudes).
- CMF practice: requests bottom-up stress tests from life insurers using the 20 percent market-value factor for real estate market risk.

### Top-down bank stress testing (BCCh) and gaps related to real estate
- Current top-down bank stress tests do not specifically target real estate crises, although the "severe scenario" magnitude is comparable to past real estate crises in other countries and GFC-type stress scenarios in major advanced economies.
- Existing tools:
  - BCCh can separately assess real estate crisis impacts via top-down stress test models for firms (e.g., shocking default probabilities of real estate developers and construction debt with increases in long-term interest rates, drops in economic activity, and increases in inflation).
  - Results are presented in BCCh FSRs as “debt at risk.”
- Identified model gaps and data issues:
  - Scenarios for commercial real estate prices appear to be excluded from top-down bank stress tests, likely due to data gaps in aggregate commercial real estate price indices.
  - Banks’ exposures to commercial real estate are currently limited, but addressing indices data gaps is crucial.
  - Real estate-related risk factors are not utilized to estimate credit costs for commercial loans in the top-down model.
  - The channel in which collateral value fluctuations affect LGDs does not seem to be implemented; current module for housing loan losses aims to capture impact on PDs but does not explicitly consider effects on LGDs.
- Recommendation for top-down model enhancements:
  - Incorporate real estate sector variables as risk factors for commercial loans.
  - Model the impact of collateral value fluctuations on credit costs, including explicit links from collateral values to LGDs.
  - Address data gaps in commercial real estate price indices to enable inclusion of commercial real estate price scenarios.

### Overall risk assessment and policy recommendations
- Baseline assessment:
  - Current adjustment in the real estate sector is expected to have only a limited impact on the financial sector.
  - DSGE model analysis indicates recent residential real estate adjustment is primarily a result of past shocks on mortgage rates; sector expected to modestly recover as loosening global financial conditions and past cuts to monetary policy rates gradually propagate to long-term interest rates.
  - Offices in the commercial real estate sector have recently begun to show initial signs of recovery.
  - Mitigating factors contribute to borrower resilience; pockets of vulnerability exist—particularly among highly leveraged mortgage borrowers.
  - Recommendation: establish a consolidated debtor registry should proceed smoothly.
- Risk scenarios to monitor:
  - Persistently high long-term interest rates that could weaken creditworthiness of borrowers in construction and real estate sectors and lead to bank losses.
  - Structural stagnation/weak demand in office markets that could negatively impact life insurers’ investment portfolios.
- Stress testing and buffers:
  - According to BCCh stress tests and exercises, current capital buffers of banks and their collaterals for loans appear sufficient to absorb stresses from these risk scenarios, including tail risks associated with a real estate crisis.
  - Real estate investments are primarily concentrated among major life insurers; their diversified portfolios should provide some resilience.
  - Supervisor’s bottom-up stress testing frameworks for banks and life insurers appear to adequately incorporate real estate-related factors.
- Policy recommendations:
  - Closely monitor adequacy of NPL provision coverage and collaterals for loans to construction and real estate firms.
  - Examine life insurers’ portfolio concentration in weak segments, such as offices.
  - Directly evaluate banks’ resilience to significant stress from a pronounced downturn in the real estate sector.
  - Enhance top-down bank stress test modeling to:
    - Incorporate real estate sector variables as risk factors for commercial loans.
    - Model impact of collateral value fluctuations on credit costs, including LGD channels.
    - Address data gaps in commercial real estate price indices to better assess propagation of real estate crises through the financial sector and macroeconomy.

### Annex I — Housing wealth effects (DSGE model results)
- Methodology:
  - Estimated DSGE model (Iacoviello and Neri 2010) calibrated and estimated with Chilean data.
  - Counterfactual simulations and reduced-form regressions: regress percentage changes (log differences) in aggregate consumption on lagged percentage changes in real house prices (lag included to mitigate endogeneity).
- Key quantitative results from simulations:
  - Regression of consumption growth on lagged growth in housing wealth (model with collateral effects): coefficient = 0.224.
  - Regression from model without collateral effects: coefficient = 0.185.
  - Implied collateral effect (difference): 0.038.
- Interpretation:
  - Simulated coefficient 0.224 falls within the 90 percent confidence interval of the analogous estimate from actual data.
  - The difference of 0.038 implies the existence of non-negligible collateral effects in housing wealth effects.

### Box on DSGE model and parameterization (highlights)
- Model features:
  - Multi-sector structure (housing and non-housing goods).
  - Financing frictions within household sector.
  - Nominal rigidities.
  - Comprehensive set of shocks, including housing preference shocks.
- Calibration and estimation details:
  - Discount factor in original paper: 0.9925 (within literature range 0.9829-0.9997).
  - Capital share range in literature: 0.33-0.34; set as 0.33.
  - Key parameter—LTV ratio for impatient households—is set at 0.8.
  - Impact of past shocks on mortgage rates is broadly robust to higher values of LTV limits (0.8-0.9).
  - Estimation sample: Chilean macroeconomic data from 2002Q1 to 2024Q1.
  - Ten observable variables used for estimation, including consumption, deflator, housing investment, real house prices, nominal mortgage rate, non-housing investment, hours worked in consumption and construction sectors, and nominal wages in both sectors.
  - Key estimated parameter: share of labor income accruing to credit-constrained agents ≈ 30 percent.

### Annex II — Input-output linkages and inter-sectoral spillovers
- Sectoral characteristics:
  - Construction sector: higher labor share (compensation of employees) than other industries.
  - Real estate sector: low labor share but high gross operating surplus.
- Supply linkages:
  - Domestic and foreign manufacturing sectors supply the domestic construction sector.
  - Domestic financial sector and construction sector provide inputs to domestic real estate sector.
  - Business services supply various inputs to both construction and real estate sectors.
- Spillover effects:
  - Construction sector: one-unit increase in production mainly increases production in manufacturing and business services; spillover to domestic manufacturers moderately smaller than regional peers but comparable to OECD average.
  - Real estate sector: one-unit increase in production mainly raises production in construction sector; spillover to construction is larger than that of regional and OECD peers.
  - Domestic spillover ratios in Chile are similar to regional peers but higher than OECD peers.

*Source: sipea2025011 - 26. Chilean life insurers’ real estate investments are constrained by specific investment limits and the CMF conducts supervisory stress testing exercises.*

### References

### References

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*Source: sipea2025011 - References*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025011.pdf_