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May 12, 2014

Mexico: dynamic economy, stable and affordable house prices

Mexico house prices

Mexico’s housing market and economy are still recovering from the economic slump which resulted from the US downturn. In 2013, house prices in Mexico rose by about 4.1%. However, when adjusted for inflation, house prices were up by only 0.4%, based on figures from Sociedad Hipotecaria Federal (SHF).

American buyers are very important as owners of beachfront properties, which were badly affected by the slump of 2009-10 in areas like Baja California Sur, Nayarit, Baja California, Guerrero and Sinaloa.

However while the ‘beachfront sector’ plunged, much of the rest of the country’s property market was largely unaffected. Indeed, stability has been the hallmark of Mexico’s housing market for many years. Prices rise (or fall) a little, and very slowly.

The Mexican market is not driven by speculators. There are many developers, and much new housing is built, which keeps prices down. Interest rates are (relatively) low in the social sectors, due to subsidies. According to SHF’s home price index, home prices in Mexico rose by 6% annually between 2005 and 2011, slightly above inflation.

The last big housing market crisis occurred after the Tequila crisis of 1994, when a major currency devaluation, followed by interest rates spiking very high, prompted 40% of all the country’s bank loans to default.

The outlook for 2014 is good, with 3%-4% GDP growth, higher than the 1.1% growth of 2013. Low interest rates, salary and employment growth, longer payment terms and a recovery in consumer confidence are also expected to drive housing demand.

The legacy of the past

Mexico non performing loans

Enrique Pena Nieto of the Institutional Revolutionary Party (PRI) won the 2012 presidential election, a return to power of the PRI which had ruled for Mexico for an extraordinary 71 years, until 2000 when for a 12-year period till 2012, the free-market/Christian Democratic National Action Party (PAN) took control.

In its heyday, the PRI controlled the Presidency, the Senate, the House of Representatives, the Supreme Court, almost all governorships and mayoralties throughout the country. It controlled all labour unions, all peasant organizations, all student organizations. Employer organizations were affiliated to the Mexican state. Opposition was met with a combination of incorporation, and death squads.

There was much electoral fraud. Toward the end of his term, the incumbent president in consultation with party leaders selected the PRI´s candidate in the next election in a procedure known as "the tap of the finger".

Mexico had an economic miracle from 1940 to 1970 based on import-substitution, when GDP increased sixfold, while the population only doubled, with annual growth rates of over 5% or 6%. But in later years Mexico did not grow fast enough to keep up with countries like Brazil and Indonesia, and Mexico began to fall behind. Increasing oil production allowed the state to spend heavily on social programs and industrialization, in an atmosphere of increasing corruption and inefficiency.

Many Mexicans began to become disaffected from the PRI during the 1970s and 80s. In December of 1994 President Ernesto Zedillo´s (1994-2000) devaluation of the peso (the “Tequila crisis”) made 1995 and 1996 the worst years of economic crisis for Mexico since the 1920s and further undermined support for the ruling party. The Mexican peso crashed from MXN 4 to US$ 1, to about MXN 7.7 to US$ 1 in November 1995.

There followed a downturn in the economy which precipitated an enormous banking and property crisis.

Yet after the crisis, the Mexican economy improved, exhibiting an average growth rate of 5.1% from 1996 to 2000.

By 2002 Mexico’s banks had been recapitalized, and a long period of expansion began. This time the growth of the housing market was built on solider foundations. Following the trauma of the crisis, interest rates had begun to fall, making it possible for lending for housing to recommence.

Mexico interest rates

Mexico experienced extraordinary growth of its housing market during the following years (2002-2007). Inflation was now low, and construction began to recover. More people began to borrow to buy houses, largely due to a big increase in government low-cost housing schemes. During the housing boom the ratio of self-built houses fell from 70% in 2000, to 30% of new houses in 2006.

By 2003 the pattern was well-established. Construction was now one of the economy’s most dynamic sectors, boosted by lower interest rates. Bank loans rose. The economy saw steady economic growth averaging about 3.9% from 2004 to 2007.

Due to falling mortgage interest rates, housing was now much more affordable. Other reforms helped: better mortgage laws, social security reform with a defined contribution system fostering long-term savings, the creation of a long-term yield for government securities.

House prices remained restrained all through this period, because the housing construction sector had become much more competitive, and many more developers were building housing. The wider economy also grew, and exports were very strong.

The following chart shows the improved situation for families in the social, economic and medium price-bands by comparing family earnings, with annual mortgage paybacks:

Mexico mortgage payments

Due to rising salaries, and to falling construction costs, housing was becoming cheaper relative to salaries, so that the number of years of salary which had to be sacrificed to buy a typical property was falling:

Mexico household receipts

By 2007 annual investment in housing was 6 times what it had been in 1999.

Mexico avg price new houses

The 2008 US downturn strongly affected Mexico, however. House sales fell strongly in 2009. Yet there was no ‘crisis‘ because the property market had been solidly-based. House prices continued to be as stable as before in most of the country, though the ‘beachfront sector’ plunged.

Mexico new housing loans

2009 saw a strong economic recession, with exports down, unemployment rising, and manufacturing falling, driven by the US economic slowdown.

Mexico’s healthy economy

In general terms, the Mexican economy is now in robust health. After a 4.5% GDP contraction in 2009, Mexico grew by 5.2% in 2010 as export demand picked up, specifically from the United States. This was followed by good years in 2011 (3.8%) and 2012 (3.9%). Mexico’s economy is highly dependent on the US, and in 2012, 78% of Mexico’s exports went to the US.

2013 was a disappointing year with 1.1% GDP growth, but the outlook for 2014 is good.

Positive trends are clear in the expansion of non-oil exports:

Mexico non oil exports
And by the expansion of GDP:
Mexico gdp

The rising middle class

Between 2000 and 2010 Mexico’s middle-class grew from 37 million to 44 million (INEGI, 2013). There are four key reasons.

First, inflation has halved: it was close to 10% in 2000, but between 2011 and 2013 the rate has hovered around 3.5%. The autonomy of the Bank of Mexico has played a key role.

Second, there is now trade openness. As a percentage of the economy, foreign trade (exports plus imports) accounts for nearly 60% of GDP, making Mexico one of the most open economies in the world. By way of comparison, the figure is 27% in Brazil, 48% in China and 30% in the United States. This is especially important because it fosters competition and puts an upper limit on the price of goods in the local market.

Third, there is the prudent management of public finances. There is no significant pressure on the fiscal balance or public debt. Between 2000 and 2012, the fiscal deficit was at levels below 1% of GDP. Total public debt, domestic and foreign, barely exceeds 30% of GDP

The last component is financial inclusion. The population using banking services rose from 33 million in 2006 to 51 million in 2012, marking an annual average growth rate of 7.5%.

The disappointments of 2013

Mexico gdp growth rate

Mexico’s economic growth was unexpectedly weak in 2013, and this had a severe impact on the housing and construction market, resulting specially from slowing infrastructure spending.

New mortgage loans fell by 11.4% during the year to October 2013, according to BBVA Research. There was only a 3.8% annual increase in house prices during the year to Q3 2012 (translating to a -0.8% decline in real terms). Declining real prices continued up to Q2 2013, but eventually there were real house price increases (though very small) in Q3 and Q4 2013.

Yet the economy is expected to bounce back in 2014 with a 3%-4% growth rate, due to the US recovery, and improved local demand.

The benchmark interest rate has remained at 3.5%, as economic growth has picked up. Inflation is still within the central bank’s target rate of 4%, slowing in March 2014 to 3.76%.

Effect of violence on the housing market

Although drug-related violence has been present in Mexico for the past three decades, the government passively ignored the problem from the 1980s to early 2000s. This norm was broken when President Felipe Calderon took office in 2006 and implemented a militarized approach to dealing with the drug cartels.

Calderon may have been partially successful, but around 60,000 people were killed during his campaign against drug cartels. News about drug-related violence particularly turned off potential American baby-boomer home-buyers.

However, a BBVA Research study has suggested that violence has only a limited effect on housing sales, because the violence is very regionally concentrated. Between 2008 and 2010, 46% of homicides were in five states only: Baja California, Durango, Sinaloa, Chihuahua and Guerrero, according to the SSP (Secretaría de Seguridad Publica or Public Security Ministry).

Plus, low income segments account for 80% of the housing market. The key issue for this segment is housing finance and housing supply, not violence, to which their communities are less vulnerable.

The Institutional Revolutionary Party (PRI) returned to power in 2012

Despite the gains under the free-market/Christian Democratic National Action Party (PAN) government, Enrique Pena Nieto of the Institutional Revolutionary Party (PRI) was elected President in 2012, ending two presidential terms under PAN, first under Vicente Fox (2000-2006) and then Felipe Calderón (2006-20012).

A major reason is undoubtedly that in 2006, Calderón chose to make the battle against organized crime the centerpiece of his presidency. By 2012 many Mexican citizens were tired of the fight they had first supported, with over 60,000 dead.

Will the PRI’s return mean a revival of the “old corruption”?

Some say that today’s PRI is completely different from the ‘old’ which ruled in corrupt association with business monopolists (“the cartels”). But many Mexicans who left for the US because of the PRI, worry about the future.

However today Mexico has a more open and competitive political system. Pressure to perform is much stronger.

Mexico’s system of housing subsidies

Mexico’s homebuilding industry has grown enormously in the past decade, with the help of high demand for homes and population growth. An important factor has been state spending through INFONAVIT and FOVISSSTE.

The government provides housing finance for low-income households, mainly through INFONAVIT (Instituto del Fondo Nacional para la Vivienda de los Trabajadores or National Fund for Worker’s Housing Institute). Infonavit deducts contributions from workers’ payrolls, and then lends at below-market rates (9%), so that borrowers pay back a portion of their minimum wage plus the interest rate. The low-end segments are also served by Fovissste (Housing Fund for Public Sector Workers), which also works on a payroll deduction system, but lends at a lower interest rate (maximum of 6%, less if the base salary is very low). There are also Sofoles, which are post-1994 private mortgage financial institutions, which sometimes co-finance with Infonavit and also provide some mid-market loans, and also fund developers.
As of Q4 2012:

  • Infonavit provided 67.94% of mortgages
  • Fovissste granted 7.53% of mortgages
  • Sofoles provided 0.10% of mortgages
  • Banks provided 13.01% of mortgages. Banks totally dominate high-end market segments.
  • Other entities granted 11.41% of mortgages

Housing subsidies were granted by CONAVI (Comisión Nacional de la Vivienda or National Housing Commission) (64%), and FONHAPO (Low-Income Housing Fund) (36%).

Almost all houses sold by developers get financing from one of four major sources.

Social housing policy has shifted

Mexico existing housing

In a significant change, in February 2013 Mexico’s government announced a policy-shift to prioritize urban developments, including measures aimed at improving existing housing stock and building high-rise residences closer to cities. The new government policy supports the strong desire of Mexicans to buy houses closer to city centres, including older houses.

During the year to October 2013 the number of loans lent by public institutions, Infonavit and Fovissste, dropped by 15.1% and 9.9%, respectively, according to the BBVA Research. Banks, on the other hand, enjoyed a 5.4% growth in the number of loans during the same period.

Mexico´s top three homebuilders have been heavily impacted. Sales of Geo, Homex and Urbi´s low-cost homes in sprawling developments far from offices and schools have tumbled in the last year, as a result of the change in government policy. These three developers hold large land-banks where Mexicans no longer want to live, and face heavy debt burdens.

While the ‘big three’ developers are now in trouble, in contrast smaller and medium-sized developers such as Javer and Ara are eyeing expansion. Homebuilders have been reallocating their resources towards higher income segments. New housing registrations for the “Economic” segment, with price range up to MXN 223,591 (US$ 17,107), fell to 4% of the total in 2012, from 6% in 2011. The “Popular” segment, with price range up to MXN 378,967 (US$ 28,994) also declined from 60% of the total in 2012, from 64% in 2011.

On the other hand, the combined “Traditional”, “Medium” and “Residential” segments, ranging from MXN 663,192 (US$ 50,740) to MXN 1.421 million (US$ 108,729), rose to 36% of the total in 2012, from 30% in 2011.

A mortgage market with few defaults

Mexico’s non-subsidized private mortgage market is small, at around 9.7% of GDP in 2013. Its mortgage interest rates remain high - the average rate for banks and Sofoles was 13.43% in February 2014, although lower than 13.83% in February 2013.

Mexicos mortgage lending

The slowing of the economy has negatively affected mortgages, with mortgage loans granted falling by 5.4% in 2011 and 5.3% in 2012. However default rates were still below 4% as of October 2013, according to BBVA Research and Comisión Nacional Bancaria y de Valores (CNBV).

Since 2000, banks have made significant changes that have led to better access to loans, and more favourable lending conditions.

  • Mortgage processing fees have been reduced to an average of 3%, from 6%.
  • Loan to value ratios have been raised to 80% – 90% from 65% or lower.
  • Loan terms have been lengthened from 10 - 15 years in 2000, to the current level of up to 30 years.

Based on the figures from the Banco de Mexico (Banxico), the amount of mortgage lending rose in double digits in 2006 by 14.4% and in 2007 by 23.8%, but slowed during the financial crisis in 2008 and 2009 by 7.8% and 5%, respectively. Although mortgage lending almost had another double digit growth rates in 2010 and 2011, it slowed again to 8.5% in 2012 and 6.2% in 2013.

As of October 2013, the amount lent from January to October 2013 fell by 6.2% as compared to the same period last year to MXN 186 billion (US$ 14.25 billion), according to the BBVA Research.

Constitutional ban on foreign land ownership might loosen

Under the current system of fideicomiso, foreigners can only indirectly own real estate, by setting up bank trusts. Although this is relatively safe, it rests on the credibility of Mexico’s banking system and property registry administration, which unfortunately discourages many foreigners.

However, the restrictions might be loosened up soon, as the congress voted in favor of a proposal which would let foreigners to directly purchase beach side properties but only for residential purposes. The proposal still prohibits foreigners to buy commercial property.

The legislation, which was passed in the Chamber of Deputies in April 2013, still requires approval from the Senate and majority of Mexico’s 32 state legislatures to become a law.


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