This paper documents the development in mortgage credit and the housing sector in Latin America over the past decade, and compares them with those of other emerging economies. In particular, it examines the real estate and mortgage markets to assess whether (i) growth in mortgage credit is excessive compared to long-term trends; (ii) trends in house prices reflect changes in economic fundamentals; and (iii) the extent to which household and banking sector vulnerabilities could lead to potential fragilities. Although data limitations hamper a rigorous analysis of trends, our analysis suggests that while there are no imminent misalignments in the real estate and mortgage sectors, they could emerge if current trends persist. Strengthening supervision and addressing data gaps is thus critical to ensure adequate monitoring of risks and vulnerabilities in these sectors.

Easy financing conditions and favorable terms of trade have fueled credit and domestic demand in much of Latin America for almost a decade now, with a short interruption during the 2008–09 global crisis. The credit expansion has been particularly impressive for the mortgage sector, where legal reforms and government subsidies have also played a role. However, this growth from generally low mortgage credit levels to a large extent reflects a process of financial deepening necessary to address the significant housing deficits in the region. However, given the region‘s long history of credit booms gone wrong, there are valid concerns about the potential buildup of financial sector excesses, even if current credit indicators appear manageable. Experience shows that credit-driven bubbles build slowly but can sour quickly. Indeed, even though housing market crashes have been rare in the region, Colombia‘s experience in the late 1990s is a useful reminder of the systemic effects that even a small mortgage sector can have on the economy. Moreover, as seen in the recent U.S. housing crisis, problems in a small market (e.g., the subprime sector) can become systemic, especially in new markets with significant data gaps.