If we go back to January 2009, the average mortgage interest rate in Chile stood at 5.92% (readjustable annual rate in UF), the highest recorded so far according to statistics from the central bank of Chile. From then on we had a decade of downward trend in these rates; for example, in January 2014 (5 years later) the average interest rate on housing loans stood at 4.32%; and in January 2019 (10 years later) the rate reached 3.24%. The low was recorded in October and November 2019 when average mortgage rates marked 1.99%. Remember that they are average rates, which will depend on each institution, foot, deadlines, offers, etc; but it is an indicator that allows us to see trends.
We now see in retrospect and with some nostalgia the low costs of access to mortgage financing that our country had achieved a few years ago, with a healthy capital market that allowed financing in enviable conditions by the countries of the region. In mid-2021, the Association of Banks and Financial Institutions of Chile (Abif) conducted a comparative study of the mortgage cost, concluding that the annual mortgage rates charged by banks in Chile are among the lowest of a selection of 19 Latin American, European, Asian and oceanic countries. Paraguay had the highest average annual rate (7.12%); in countries such as Mexico, Costa Rica, El Salvador, and Colombia registered mortgage rates above 6% per year. Dominican Republic; Russia and Peru with rates greater than 5% per year. Brazil 3.1%. While Chile figured with an average annual rate of 2.51%. Among the countries that recorded mortgage rates lower than Chile were: New Zealand, Australia, Denmark and South Korea with annual rates in the range between 1% – 2%. Further down even Switzerland, Canada and the USA with annual rates in the order of 0% – 1%. That is, Chile appeared with good mortgage credit conditions compared to countries in the region.
But from the end of 2019 until today the trend has been reversed and a gradual and sustained rise in the cost of mortgage financing began to be observed. The increase in political and economic uncertainty with the social explosion began to have effects on interest rates. It is that we can agree or not, we may like it or not, but the economy reacts and overreacts also to emotional factors and expectations, and uncertainty leads to financial institutions covering themselves from the greatest risk with more restrictive financial conditions for customers such as interest rate hikes and greater demands. Due to their magnitude, the 3 withdrawals of funds from AFPs also affected the capital market, the AFPs had to make cash quickly to meet the withdrawal requirements, selling fixed income assets at lower prices and that raised the interest rates of long-term financing which negatively impacted mortgage rates, it was something that had been warned and many did not believe, but today we see that it did have effects.
By August 2021 the average annual mortgage rate had already exceeded 3% (3.1%); and at the end of 2021, December, the rate reached 4%; going back with this more than 8 years in financial cost for housing, that is, it returned to levels of rates of mid-2014. The low rates and good conditions that had been achieved gradually in almost a decade, were quickly destroyed in a couple of years.
The latest data available by the issuing institute, for January 2022 notes an average annual mortgage rate of 4.2% showing that the deterioration of financial conditions for housing continues, moving further and further away from the historical lows and the trajectory they brought for many years.
Buying a home seems to be increasingly difficult today, mortgage rates have reached maximums that were not seen in more than 8 years, but in addition to the higher cost, there are greater requirements and demands for future owners, such as a greater foot that financial institutions are demanding. Before, typically it was financed around 90% of the value of the home, today that has dropped to 80% which implies a greater savings effort for those who wish to buy. On the other hand, the institutions have been reducing the terms, if before we saw mortgage loans to 30 years that today has been reduced to 20 years. The reduction of terms implies an increase in the value of the dividend, and also greater demands on the client’s profile (income, isability, profession, background, etc.) which harms and restricts access to financing for properties.
Let’s add a scenario with high inflation (7.7% in 12 months to January 2022) and with upward projections, which continues to raise the development unit (UF) which in turn raises the amount of the dividend and continues to push up interest rates. Additionally, the price of houses and apartments also continues with an upward trend.
The credit conditions for housing have narrowed considerably, in terms of rates we have gone back almost a decade, but we also find more restrictive conditions in other factors such as terms, foot and customer profile. Expectations for potential home buyers are not favorable, since, given the situation of high inflation, it is expected that the central bank will continue to raise the monetary policy rate (TPM) reference rate of the financial system, so it can be expected that the cost of credit would continue its upward trend. The rate hike is one of the collateral damages of inflation, added to the important effect of AFP withdrawals where AFPs had to quickly liquidate assets to pay, which raised rates, while also pushing up prices.
Chile has stood out at the regional level for offering housing loans at relatively low rates, thanks to a dynamic capital market. There are concerns that this advantage is weakening. AFPs are an important player in our capital market, they are buyers of long-term fixed income assets that in turn provide financing to banks so that they offer mortgage loans. Thinking about new withdrawals, total withdrawal or the disappearance of AFPs would affect the mortgage loan market much more, the source of financing for housing credit would be put at risk and costs would rise significantly.
The content expressed in this opinion column is the sole responsibility of its author, and does not necessarily reflect the editorial line or position of El Mostrador.
