In Guatemala there are substantial and growing imbalances in the housing market; at the same time, financial markets remain shallow and underdeveloped. The analytical framework applied in this paper starts by identifying the types of market failures responsible for the underdevelopment of the housing finance system. The working hypothesis is that there is a correlation between the nature and scope of market failures, and the kind of public interventions actually implemented. Evidence collected points to a rejection of the policy adequacy hypothesis. Nevertheless, it is encouraging that solutions have begun to emerge as economic agents learn to overcome market failures; these experiences are reinterpreted as “natural experiments” showing what could happen if market failures could be fixed at a large scale through appropriate government policy. Building on this framework, the paper proposes guidelines for the design and implementation of housing finance policy in Guatemala.

Housing plays a key role in social development and improvement of household welfare; however, there are growing geographic, qualitative, and quantitative housing imbalances. At the same time, financial markets in Guatemala remain shallow and underdeveloped in comparison to prevailing regional standards. Additionally, housing finance is but a minor component of bank credit despite the fact that a state-sponsored mortgage insurance system has been available for several decades. Most market failures in Guatemala are of the horizontal type (e.g., poor protection of property rights, low incomes and labor informality), while most vertical-type distortions are the unintended result of public policies (e.g., restrictive tax provisions, non-transparent guidelines for home appraisal, or an overly narrow mortgage insurance system). It is found that public policy is generally failing to effectively address horizontal market failures although some failures are addressed within the mortgage insurance system.