Description

An abrupt adjustment in housing values could impact the banking system’s capital, given its role as collateral for mortgage and commercial loans. Moreover, such a shock would affect aggregate demand, particularly the residential construction sector and household consumption, through the wealth effect. This study presents two tools to analyze the potential impact of a decline in housing prices on the banking system. The first consists of a model that estimates the long-term equilibrium price of housing in Chile at the macrozone level, facilitating the identification of possible misalignments relative to fundamentals. The second tool is a stress test designed to assess the impact of a potential sharp drop in prices on bank capital. Evidence suggests that, in general, price movements have been consistent with income trends and financing conditions. In an adverse scenario as described, the impact on provisions would be significant; however, it would not have material effects on bank capital.