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According to the governing body, the deterioration in the labor market could strain the payment capacity of those mortgage debtors who depend on the lease to pay their loans.
Covid-19 had not even started infecting people in China when the Central Bank first warned that the purchase of apartments by individual investors could create risks. Now, in the midst of the health crisis, this risk seems only to grow according to the Financial Stability Report (IEF) presented this morning.
“With respect to the previous IEF, the residential real estate sector decreased its dynamism. This situation could intensify in the future and expose the vulnerabilities highlighted in previous reports, such as the high participation of leveraged retail investors,” said the governing body.
Compared to previous years, the real estate market has been impacted in the recent past. As highlighted by the entity, the adjustment of dynamism in the sector began with the outbreak in October last year, and intensified this year thanks to the pandemic.
These factors caused a 50% drop in the sale of new homes in the Metropolitan Region during the first quarter of this year, according to data from the Chilean Chamber of Construction, with a focus on the apartment market.
“The current scenario affects construction and real estate companies that have had to halt projects and have seen their sales decrease,” said the Central, adding, “Leveraged retail investors who use rental income to pay their mortgages may struggle with the deteriorating labor market.”
The lower dynamism of the market could cause a downward adjustment in property prices and future investment volumes in the battered industry, according to the Central. This is because the cash needs of the construction companies could boost the discounted sale of some projects, “a situation that could become systemic if it affected the expectations of other agents.”
As to the leases, As of the third quarter of last year, there was a moderation in rental prices and a greater “slack” in the segment, evidenced by the greater availability of units.
“The deterioration in the labor market should increase these greater gaps. This situation could stress the payment capacity of those mortgage debtors who depend on the lease to pay their loans (leveraged retail investors), exposing one of the main vulnerabilities highlighted in previous reports, “warns the Central.
Therefore, the entity identifies a significant deterioration in the labor market as the greatest risk for this segment.
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