The Impact of Rising Mortgage Rates on Housing Demand Among Middle-Income Groups: Evidence from Chile

We present empirical evidence on the sensitivity of housing demand in Chile to changes in mortgage interest rates, focusing on units priced between 2,000 and 4,000 UF (approximately USD 80,000 to 160,000). This segment, which comprises nearly two-thirds of the country’s housing supply, has experienced a significant decline in sales since 2021. Given its size and responsiveness, it represents a key target for policy measures aimed at reactivating the Chilean real estate market such as demand-side subsidies for middle-income households. Using impulse response functions derived from vector autoregressive (VAR) and semi-structural models estimated via Bayesian methods with Markov Chain Monte Carlo (MCMC) simulations, we find that a 100 basis-point increase in mortgage rates leads to an average annual 18% drop in housing sales during the first quarter after the shock. This effect intensified over time, resulting in a cumulative decline of approximately 57% by the end of the year. A comparable reduction in mortgage rate yields a symmetrical response. Finally, we offer a linear extrapolation of potential impacts under a hypothetical 200 basis point decrease in mortgage rates.