Finance: Latin America's Mortgage Market
Since 2003, mortgage credit in Latin America has expanded at an annual rate of 14 percent (adjusted for inflation)—well above rates observed in emerging Asia but below the exorbitant rates seen in emerging Europe before its housing bust. The region’s credit expansion has been accompanied by burgeoning real estate prices and construction activity—now representing more than 6 percent of GDP, higher than in emerging Asia or Europe. Mortgage growth has been particularly strong in Brazil, where the five-fold increase in mortgage credit since 2007 has been accompanied by a near tripling of house prices in the main metropolitan areas.
Despite the recent growth, the mortgage market in most Latin American economies (except Chile) remains relatively small by international standards. [SEE CHART] In the six most financially open Latin American economies (Brazil, Chile, Colombia, Mexico, Peru, and Uruguay), mortgages average just 7 percent of GDP, compared to over 20 percent in emerging Asia and over 65 percent in the United States. Moreover, the bulk of mortgage credit in Latin America continues to be provided by commercial banks, funded primarily through domestic deposits, with only a small share securitized. This is in sharp contrast with emerging Europe in the run-up to the recent crisis, where the mortgage expansion involved non-banks and was financed increasingly through wholesale and cross-border funds.
While some further deepening in mortgage and overall credit would be natural in the future, the rapid expansion of credit deserves closer monitoring to avoid a buildup of vulnerabilities and a repeat of the boom-bust credit cycles that have plagued the region in the past.
Our recent research, Latin America: Vulnerabilities Under Construction?, suggests that in a few countries (notably Brazil and Peru) mortgage credit and housing prices may be growing at a faster pace than can be explained by past trends and economic conditions. That said, the rapid expansion of mortgage credit may be partly explained by factors not captured in standard models, as in Brazil, which recently introduced the government-sponsored housing credit program, Minha casa, minha vida.
Other indicators suggest that housing-related vulnerabilities are contained. Mortgages, at about 20 percent of total bank loans, remain a small share of bank portfolios. Non-performing mortgage loans remain relatively low (around 3 percent of total mortgages), and household indebtedness indicators are manageable—hovering near 35 percent of disposable income, versus 60 percent in emerging Europe.
But caution is warranted in drawing firm conclusions, because the limited information available for the housing sector hinders a proper risk assessment in most Latin American countries. Data on housing prices are only available for six countries, and, even when available, price data often cover limited time spans and/or specific metropolitan areas. For example, Brazilian house price data are only available since 2008; Colombia and Peru have the longest time series (dating back to the 1990s), but coverage is limited to metropolitan areas. Information on the stock and flows of housing, as well as on construction activity, is also patchy.
Latin American countries should prioritize gathering more information and strengthening oversight of the housing sector. These efforts should be complemented by reforms to improve credit registries and increase consumer financial literacy. In countries where mortgage credit growth is too rapid, macroeconomic policies should be adjusted to control credit risks.
The global financial crisis of 2008 has made clear that mortgage markets can have broad effects on the economy. In the U.S., the subprime mortgage market, which represented just one-eighth of the mortgage market, was enough to trigger a financial disaster.
Credit-driven asset price bubbles in segments of the economy build slowly. But they can sour quickly, especially in new markets with significant data gaps. Given Latin America’s long history of credit booms gone wrong, it is thus best to be vigilant and prepared.