House price growth surges as a new president is elected in Mexico
Maria de Guzman | November 16, 2018
Mexico's house prices rose by 9.92% during the year to Q2 2018. When adjusted for inflation, house prices were up by 5.12%, according to the SociedadHipotecaria Federal (SHF). This followed the 8.73% y-o-y growth in Q1 2018 (3.25% inflation-adjusted).
Mexico's housing market has enjoyed nominal growth for a decade, but the real (inflation-adjusted) numbers are prosaic:
Despite the uncertainty regarding real estate development in the areas affected by the massive earthquake of September 2017, Mexico's residential market remained strong after the quake. While some affected areas in Mexico City suffered house price declines, housing demand shifted to other neighbourhoods, boosting house prices there.
In one of Mexico City's oldest neighbourhoods, Coyoacán, there was a 49% rise in house prices during 2017, according to the real estate portal Propiedades.com. Other strong rises were seen in Alamos (34.47%), Escandon (26.14%), and San Angel (23.86%). In contrast, the neighbourhoods with massive price drops include Anahuac (-30.45%), Pedregal (-26.63%), Claveria (-20.37%), and Doctores (-14.16%).
"As a result of the earthquake the property geography has changed, and although areas like Nuevo Polanco continue to develop, they no longer do it as spectacularly as before the earthquake and demand in other areas begins to increase, far from the affected areas," according to Federico Sobrino of the Institute of Property Management and Infonavit.
Mexico has an enormously strong domestic market. Most Mexicans who move generally prefer to buy rather than to rent. Around 82% of Mexicans want to buy a property, as opposed to 18% that prefer to rent, according to Lamudi's recent Real Estate Market Report.
The Mexican market is not driven by speculators. There are many developers, it is highly competitive. Much new housing is built, which keeps prices down. Interest rates are (relatively) low in the social sectors, due to subsidies. This was affirmed by Citibanamex's Executive Director of Mortgage and Automotive Credit Ricardo García Conde, stating that housing demand in Mexico is "real", meaning that the house price movements in Mexico are mostly due to the market's supply and demand with a minimum percentage of speculative purchase.
While the general outlook for Mexico's housing market is good, Lamudi pointed out that there are three factors that brought uncertainty to the market: the elections, NAFTA, and the global economy.
Mexico City: rental yields are moderately good
Gross rental yields in Mexico City - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - are moderately attractive.
Alvaro Obregon includes Jardines del Pedregal, which hosts some of Mexico's richest families. A typical property here might cost $2,500 per square metre, and be rentable for a return of around 5%. It also includes a large part of Santa Fe, one of Mexico City's major business districts, which is mostly high rise but also has Centro Santa Fe, the largest mall in Latin America. Residential property in Santa Fe can cost around $2,000 per square metre, and earn a yield of 6.35%. Other districts for which we have numbers include Los Alpes and San Angel.
Benito Juarez is the richest alcaldia in Mexico and is primarily populated by the middle and upper middle classes, with social indicators similar to that of advanced developed countries, with the highest levels of education, health, and income in the country. The borough is home to a number of landmarks such as the World Trade Center, the Estadio Azul, the Plaza Mexico, and the Polyform Cultural Siqueiros.
We have figures for Del Valle, where apartments cost around $2,000 per square metre and may yield a rental return of around 5%. As always, these are rough figures and the range of variation is large.
Just west of the historic centre, Miguel Hidalgo contains mostly working class areas in and around Tacuba and Tacubaya, but its southwest contains some of the most exclusive colonias. At its centre is Chapultepec Park (the "Bosque de Chapultepec") (Chapultepec Forest) - the largest city park in Latin America. Most of the diplomatic missions in Mexico City are located in Miguel Hidalgo, mainly in the Lomas de Chapultepec and Polanco area. These are highly-priced districts, with an average price of $4,817 per square metre in Polanco, $2,489 in Bosque de las Lomas. Rental yields average between 3.3% and 4.2%.
Mexico has high taxes on rental income
Rental Income: Nonresident individuals are generally liable to pay 25% withholding tax on their gross rental income.
Capital Gains: Nonresident individuals selling Mexican property are generally liable to pay 25% withholding tax on the sales price. However, nonresident individuals with appointed local representatives may be taxed on their net capital gains (sales price less acquisition costs and related costs) at 30%.
Inheritance: There are no inheritance taxes in Mexico.
Residents: MexicanResidents must pay income tax on their worldwide income at progressive rates, from 1.92% to 35%.
Total transaction costs
range from low to moderate in Mexico
The total roundtrip transaction costs are around 4.61% to 11.17% of the property value, depending upon the location, and value of the property. Property acquisition tax, notary public fees and registration fees vary in each state and/or city.
Additional costs for the buyer include title insurance, legal fees for Spanish-speaking lawyer, bank fees for setting up a trust (fideicomiso), and permit from the foreign affairs office. Real estate agent’s fee is around 3% to 6% (plus 16% VAT) and typically paid by the seller.
Laws are pro-tenant
Mexico landlord & tenant law is pro-tenant.
Rent Control: The rent freeze imposed in Mexico City in 1948, and lifted only in 1992, have driven investors out of the rental sector or to the informal rental market. Rent increases are generally tied to the consumer price index.
Tenant Security: The law favors the tenant and it is difficult for the landlord to evict the tenant upon the termination of the contract.
Economic outlook remains positive in 2018; USMCA reduced uncertaintiesThe Mexican economy expanded by 2.6% during the year to Q2 2018, up from 1.4% y-o-y growth in Q1 2018, according to the InstitutoNacional de Estadistica HYPERLINK y Geografia (INEGI). The recent growth was fueled by improvements in household spending (up by 3% y-o-y), government spending (up by 2.9% y-o-y), and even fixed investment, which managed to rise by 3.9% y-o-y despite the uncertainties brought by the July 2018 elections.
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 1.4% GDP growth, but in 2014 there was 2.8% GDP growth. The economy expanded further to 3.3% in 2015, but slowed to 2.9% in 2016. In 2017, the economy expanded by 2%, Mexico's lowest growth in four years, as a result of a slight drop in the service sector and an inactive industrial sector.
Mexico's economic outlook remains positive in 2018, although growth forecasts were recently lowered to 2% to 2.6% by the central bank, Banco de Mexico.
Banxico Governor Alejandro Diaz de Leon Diaz noted that short-term risks, including the rising global protectionism, and volatility in the international financial markets. The uncertainties related to the renegotiation of the North American Free Trade Agreement (NAFTA) and the policies of President-elect López Obrador's future administration are also affecting investment.
On September 30, 2018, Mexico, along with Canada and the United States, reached an agreement to replace NAFTA with a new trade deal but with few notable changes. The new deal, which was rebranded as the United States-Mexico-Canada Agreement (USMCA), is yet to the ratified by the three parliaments.
"A deal between the Canadian, Mexican and U.S. governments for a revised trilateral free trade agreement should reduce key uncertainties for U.S.-Canada and U.S.-Mexico trade that have been in place since the U.S. announced its intention to renegotiate NAFTA," according to Fitch Ratings.
Unemployment stood at 3.3% in September 2018, unchanged from September 2017. Consumer prices were up by 5.02% during the year to September 2018, down from last year's 6.35% inflation but above the central bank's 3% to 4% target for 2018.