Mexico’s housing market remains robust
Lalaine C. Delmendo | October 15, 2021
Mexico’s housing market remains healthy, amidst improving economic conditions. The nationwide house price index rose by 7.72% during the year to Q2 2021, following y-o-y increases of 6.59% in Q1 2021, 5.38% in Q4 2020, 5.02% in Q3, and 4.78% in Q2, according to the Sociedad Hipotecaria Federal (SHF). When adjusted for inflation, house prices increased 1.67% y-o-y in Q2 2021.
On a quarterly basis, house prices rose by 2.29% (0.87% inflation-adjusted) during the latest quarter.
By metropolitan area, Tijuana recorded the biggest y-o-y house price growth of 10.51% (4.31% inflation-adjusted) during the year to Q2 2021, followed by Guadalajara (9.14%), Puebla-Tlaxcala (9.05%), Monterrey (8.74%), Querétaro (7.22%), León (7.21%), and Toluca (6.61%). In Valle deMéxico, house prices increased modestly by 3.65% (-2.17% inflation-adjusted).
Mexico’s housing market takeoff comes after it has suffered prosaic growth for a decade, in real (inflation-adjusted) terms, despite strong nominal growth:
MEXICO HOUSE PRICE INDEX, ANNUAL CHANGE (%)
|Sources: SociedadHipotecaria Federal (SHF), Global Property Guide|
The secret is Mexico’s enormously strong domestic market, particularly the rising middle class. In 2020, the country’s middle class was estimated to account for almost half of the total households, at about 16 million. They are expected to continue growing, with about 3.8 million more households projected to move into the middle class by 2030. Moreover, 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.
Foreign demand is also robust. Despite the pandemic, American and Canadian buyers continue to return to Mexico, after a several-year slump, thanks to low oil prices and the strong US dollar, pushing home values up. More than 1 million Americans live in Mexico, and more than 500,000 own homes in the country, according to a Forbes article.
For instance Playa del Carmen, one of the largest cities on Mexico’s Riviera Maya coastline, has seen a sharp uptick in demand from homebuyers seeking refuge from pandemic-related lockdowns.
“We have a history of traditionally being a buyer’s market because there’s just a lot inventory – I like to say there’s a lot of candy in the candy store,” said Judi Shaw, the owner of Living Riviera Maya Real Estate. “But suddenly we had a lot of longstanding inventory get snapped up last year and early this year. So that’s making it more of a balanced market.”
This is supported by other local real estate experts, including Jason Waller, the owner of Playa Real Estate Group: “We have a lot of clients from New York, and a lot of people are looking for beachfront houses so they can enjoy life on the beach if there’s another lockdown, instead of being stuck in a condo in the city and hating their family, said Waller.
In the past three years, the value of the Mexican peso (MXN) depreciated by 6.1% against the US dollar, to reach an average exchange rate of USD 1 = MXN 20.087 in August 2021.
Since the Mexican housing market is not driven by speculators, it has been resilient despite the pandemic. In fact, house prices are expected to continue rising during the remainder of the year, according to local real estate experts.
During 2020, the economy tumbled by a huge 8.2%, its biggest annual contraction since the 1930s, according to the National Institute of Statistics and Geography (INEGI). But economic conditions are now dramatically improving. Mexico’s economy recorded a whopping 19.6% year-on-year growth in Q2 2021, after eight consecutive quarters of economic downturn, as the country battled the twin impact of the COVID-19 pandemic and energy shortages.
Because of the economy’s strong performance during the latest quarter, the International Monetary Fund (IMF) has recently revised upwards its 2021 growth forecast for Mexico to 6.3% from its initial estimate of a 5% expansion.
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. In previous years, Global Property Guide found that rental yields in Mexico City were between 3.4% and 6.4%.
Examples of yields:
4.7% to 6.35% in Alvaro Obregon, which includes Jardines del Pedregal, which hosts some of Mexico’s richest families.
A typical property here might cost around US$2,500 (MXN 49,713) per square metre (sq. m.), and be rentable for a return of around 5%. A residential property in Santa Fe, one of Mexico City’s major business districts, can cost around US$2,000 (MXN 39,770) per sq. m., and earn a yield of 6.35%. In Los Alpes and San Angel yields range from 4.7% to 5%.
5% in Benito Juarez. This is the richest alcaldia in Mexico and is primarily populated by the middle and upper middle classes.
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. In Del Valle, apartments cost around US$2,000 (MXN 39,770) per sq. m. and may yield a rental return of around 5%.
3.3% to 4.2% in Miguel Hidalgo, just west of the historic centre. This contains mostly working class areas in and around Tacuba and Tacubaya, but its southwest contains some of the most exclusive colonias.
Most of the diplomatic missions in Mexico City are located in the area, mainly in the Lomas de Chapultepec and Polanco area. These are highly-priced districts, with an average price of about US$4,800 (MXN 95,449) per sq. m. in Polanco, US$2,800 (MXN 55,679) in Lomas de Chapultepec and US$2,500 (MXN 49,713) in Bosque de las Lomas. Rental yields average between 3.3% and 4.2%.
Strong demand from foreign buyers
Despite the pandemic, American and Canadian buyers have been returning to Mexico in recent years, after a several-year slump, thanks to low oil prices and the strong US dollar, pushing home values up.
For instance Playa del Carmen, one of the largest cities on Mexico’s Riviera Maya coastline, has seen a sharp uptick in demand from homebuyers seeking refuge from pandemic-related lockdowns. In the first half of 2021, Shaw said that her firm already sold the same number of properties as in all of 2020, and the average sales price was higher, at US$435,500.
“We have a lot of clients from New York, and a lot of people are looking for beachfront houses so they can enjoy life on the beach if there’s another lockdown, instead of being stuck in a condo in the city and hating their family, said Jason Waller, the owner of Playa Real Estate Group.
American buyers are very important as owners of beachfront properties in the country. More than 1 million Americans live in Mexico, and more than 500,000 own homes in the country, according to a Forbes article. In fact an earlier article published by Point2 Homes ranked Mexico first among 30 favourite US and Canadian destinations for second home searches. Some of the most sought after Mexican destinations on Google include Puerto Vallarta, Cancun, Playa del Carmen, Cabo San Lucas, and San Miguel de Allende.
Foreign buyers are also eyeing properties in Cuernavaca’s prime neighborhoods, such as Sumiya, Palmira, and Tabachines, according to Guadalajara Sotheby’s International Realty’s agent Laura de la Torre de Skipsey.
In Mexico City, foreign buyers (mostly from Brazil, Spain, and US) tend to invest in new construction or commercial properties, and are in the city for work.
Foreign land ownership
The Foreign Investment Law of 1973 allowed foreigners to purchase real estate anywhere in Mexico except the restricted zone that consists of areas within 100 km (64 miles) of international borders or within 50 km (32 miles) from the coastline at high tide. In 1993, Mexico amended the constitution to allow foreigners to purchase real estate within the restricted zone by means of a fideicomiso.
Under the current system of fideicomiso, foreigners can only own real estate in the restricted zone indirectly, by setting up bank trusts. While the trustee is the legal owner of the real estate, the beneficiary retains all ownership rights and responsibilities and may sell, lease, mortgage, and pass the property on toheirs. The fideicomiso is authorized by the Mexican Government under the Ministry of Foreign Affairs.
Although this system is relatively safe, it rests on the credibility of Mexico’s banking system and property registry administration, which unfortunately discourages many foreigners.
The rising middle class
In 2020, the country’s middle class was estimated to account for almost half of the total households. The middle class is expected to continue growing, with about 3.8 million more households to move up to the middle range by 2030. This is for several key reasons:
First, inflation has halved: it was close to 10% in 2000, but between 2005 and 2020 the rate has hovered around 4%. The autonomy of the Bank of Mexico has played a key role. However, the massive gas price hikes drove Mexico’s inflation rate to a 16-year high at 6% in 2017. This pressured the central bank to bring inflation back to its +/-3% target. Currently, inflationary pressures are building up again.
Second, there is now trade openness. As a percentage of the economy, foreign trade (exports plus imports) account 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 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. Between 2000 and 2012, the fiscal deficit was below 1% of GDP and in 2019, the deficit fell again to 1.6% of GDP. Though the deficit increased again to 4.6% last year due to pandemic-induced government spending. Total public debt, domestic and foreign, stood at just 45.1% of GDP in 2019 but increased to a multi-decade high of 52.1% last year. Both the fiscal deficit and public debt are expected to gradually decline in the coming years.
Fourth, financial inclusion. The population using banking services rose from 33 million in 2006 to 51 million in 2012. Yet 66% of adults in Mexico do not own a bank account. Also, the credit-to-GDP ratio in Mexico stood at just about 34% - stubbornly low relative to comparable Latin American countries. To address the problem, the government launched in 2016 the National Financial Inclusion Strategy (NFIS) to accelerate access to financial services for the population currently left out. Moreover the FinTech Law, passed in March 2018, which aims to develop Mexico’s own Open Banking Standard, is expected to help foster innovative solutions for people currently excluded from the financial system. In January 2020, the government issued its first license to NVIO Pagos México to operate as a financial technology institution under the new law. Currently, there are at least 93 fintech firms in the process of obtaining their license.
Local house price variations
Mexico’s most expensive houses are in Mexico City, State of Mexico, Morelos, Nuevo León, Jalisco, Nayarit and Querétaro.
In Polanco and Lomas, Mexico City’s most exclusive neighbourhoods, prices of luxury residential properties can range from US$6,000 (MXN 119,300) to US$10,000 (MXN 198,800) per square metre (sq. m.), according to according to Carmella Peters Romero of Peters & Romero BienesRaices. In Santa Fe, one of Mexico City’s modern districts, properties can be bought at U$2,000 (MXN 39,800) to US$ 4,000 (MXN 79,500) per sq. m.
In Cuernavaca, capital of the state of Morelos, an hour and a half drive from Benito Juarez International Airport in Mexico City, luxury homes are available at prices above US$1.5 million (MXN 29.8 million). Low-end three-bedroom homes can be bought starting from US$200,000 (MXN 4 million), while mid-range houses with three to four bedrooms are priced at US$500,000 (MXN 9.9 million), according to Andrea Dolch Espinosa de los Monteros of Mexico Luxury Estates.
In Playa del Carmen, a coastal resort town along the Yucatán Peninsula’s Riviera Maya, a three-bedroom apartment is priced at US$ 460,000 (MXN 9.1 million). In Playacar, a gated community of resort developments in Playa del Carmen, two- to three-bedroom luxury homes list between US$500,000 (MXN 9.9 million) to US$1 million (MXN19.9 million).
In Tulum, another resort town located in Mexico’s Caribbean coast, a three-bedroom townhouse in the exclusive gated community of AldeaZamá can be bought for about US$395,000 (MXN 7.9 million).
In Cancún, a city in southeastern Mexico known for its beaches, mega-resorts, and frenetic nightlife, the average price of houses was at around US$250,000 (MXN 5 million) last year. Apartments in the area have prices ranging from US$100,000 (MXN 2 million) to US$200,000 (MXN 4 million).
Mortgage rates remain high
Mortgage interest rates remain high. The average interest rate for mortgage loans offered by banks and Sofoles was 12.67% in July 2021, slightly up from 12.57% in the previous year. Mortgage rates in Mexico range from 8.9% to 17.34% in July 2021.
The central bank Banco de Mexico (Banxico) raised its key rate by another 25 basis points to 4.5% in August 2021, following a 25 basis points rate hike in June 2021, as expectations of inflation this year rose again amidst improving economic conditions.
Banxico slashed the key rate nine times from 7.5% in December 2019 to 4% in February 2021, in an effort to contain the impact of the COVID-19 pandemic and plunging oil prices.
Small mortgage market
The non-subsidized private mortgage market in Mexico is small, at around 12% of GDP in 2020, just a bit higher than 9.5% of GDP a decade ago. Mortgage lending from non-banks accounts for 63% of all mortgage loans.
“Non-bank finance companies are growing quickly by tapping two niche market segments--low-income individuals and small and medium enterprises (SMEs) - that banks are reluctant to lend to because of their relatively high risk, as well as the high cost of serving them,” said Moody’s Investors Service Associate Analyst Vicente Gomez.
In Q2 2021, the total value of mortgage loans outstanding rose by 7.1% y-o-y to MXN 2.9 trillion (US$146.2 billion), following annual rises of 7.8% in 2020, 6.7% in 2019, 8% in 2018, 8.7% in 2017, 9.6% in 2016, and 9.4% in 2015, according Banco de Mexico. Over the same period:
- Banks: mortgage lending was up 9.3% y-o-y to MXN 1.07 trillion (US$53.9 billion)
- Non-banks: mortgage lending rose by 5.8% y-o-y to MXN 1.83 trillion (US$92.3 billion)
Since 2000, banks have made significant changes leading to better access to loans.
- 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.
During 2020, the economy shrank by a huge 8.2%, its biggest annual contraction since the 1930s, according to the National Institute of Statistics and Geography (INEGI).
But even before the pandemic, the Mexican economy had been adversely impacted by the uncertainties related to the renegotiation of the North American Free Trade Agreement (NAFTA) (now rebranded as the United States-Mexico-Canada Agreement or USMCA), the US-China trade war, as well as the policies of President-elect López Obrador’s administration. Investor confidence has been upset by some of López Obrador’s recent policies, including his decision to cancel a partly-built US$13 billion airport for Mexico City and his withdrawal from the prior government’s opening of the oil and gas industry to private capital.
As a result all three major ratings agencies downgraded Mexico last year. In March 2020, Standard & Poor’s lowered the country’s sovereign bonds to BBB, with negative outlook. Fitch Ratings and Moody’s followed in April, downgrading Mexico’s ratings to BBB- and Baa1, respectively.
Fortunately, economic conditions are now dramatically improving. Mexico’s economy recorded a whopping 19.6% year-on-year growth in Q2 2021, after eight consecutive quarters of economic downturn, as the country battles the twin impact of the COVID-19 pandemic and energy shortages.
During the year to Q2 2021:
- Industrial activity, with accounts for almost one-third of the economy and is very dependent on US demand, soared 28.2%, in contrast to the previous quarter’s 2.7% fall.
- The services sector and related activities, which accounts for about 60% of the economy, grew by 17.1%, following a 4% increase in Q1.
On a quarterly basis, the Mexican economy grew by 1.5%, an improvement from the previous quarter’s 0.8% growth and from the prior year’s huge 16.9% q-o-q contraction.
Because of the economy’s strong performance during the latest quarter, the International Monetary Fund (IMF) recently revised upwards its 2021 growth forecast for Mexico to 6.3% from its initial estimate of a 5% expansion.
Unemployment fell to 4.4% in July 2021, down from 5.4% in the previous year but still far higher than the pre-pandemic jobless rate of 2.9%, according to INEGI.
Consumer prices were up by 5.59% in August 2021, up from 4.05% a year earlier and far above the central bank’s target range of 2% to 4%.
Politics, drugs and corruption
In the June 2021 midterm elections, Andrés Manuel López Obrador (famously called AMLO) of the left-wing National Regeneration Movement (MORENA) failed to win two-thirds congressional supermajority required to usher through constitutional amendments uncontested, though his party kept its majority with the support of allied parties.
“This is a tolerable loss at the margin for AMLO after what’s been a disastrous two and a half years,” said Federico Estévez, professor at the Autonomous Technological Institute of Mexico. “He keeps the institutional power that counts: the budget process and congress.”
In more than two years, AMLO instituted actions such as programs of cash payments for seniors and students and raising the minimum wage. However, he has been criticized for his handling of the pandemic, the economy, security, and the persistently high level of gang violence and killings. Yet AMLO, a popular and populist figure, still enjoys approval ratings of about 60%.
In general elections in July 2018, AMLO inflicted a massive defeat on the previously-ruling Institutional Revolutionary Party (PRI). Obrador won a landslide victory with 53% of the votes, defeating Ricardo Anaya of the National Action Party (PAN) (22%), José Antonio Meade of the PRI (16%), and independent candidate Jaime Rodríguez (5%).
AMLO is the first president to win an outright majority since Mexico transitioned to democracy in 1988, and the first elected president not to come from either the PRI or its predecessors. He took office on December 1, 2018.
AMLO’s presidency follows that of the PRI’s Enrique Peña Nieto (called by many “the new face of the old guard”) who was president 2012-2016. He promised big changes, and was initially feted by investors. However many soon came to feel that Nieto intended to re-establish the PRI’s old corrupt hegemony.
Nieto was involved in two major housing scandals:
- The revelation that first lady Angelica Rivera’s US$7 million (MXN 139 million) house in Lomas de Chapultepec was registered under the name of a construction company property that received contracts in the state of Mexico when Nieto was governor.
- In November 2014 a high-speed train contract was awarded to a Chinese-led consortium. The contract was later scrapped when it was revealed that the president’s White House family mansion had been paid for by a contractor who was a member of the train consortium.
From 2000-2012 the PRI’s long and corrupt rule was interrupted by the National Action Party (PAN), with power held 2006-2012 President Felipe Calderon. He brought big changes. Although drug-related violence has been present in Mexico for the past three decades, the government had passively ignored the problem from the 1980s to early 2000s, until Calderon 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. Exhaustion with this seemingly unendingly escalating toll of violence returned the PRI to power in 2012.
However, violence has in fact climbed to new highs recently. In 2020, Mexico registered 36,579 homicides. The homicide rate stood at 27.8 deaths per 100,000 people last year – the ninth highest in the world. Mexico is home to the five cities with the highest homicide rates in the world: Tijuana, Ciudad Juarez, Uruapan, Irapuato, and Ciudad Obregon.
Despite this, a BBVA study has suggested that violence has only a limited effect on domestic housing sales, because the violence is very regionally concentrated.
- Índice SHF de Precios de la Vivienda en México 2021 a 2025 (Gobierno de Mexico): https://www.gob.mx/cms/uploads/attachment/file/660530/ZM_2021T2.pdf
- Household Credit Interest Rates - (CF303) (Banco de Mexico): https://www.banxico.org.mx/SieInternet/consultarDirectorioInternetAction.do?accion=consultarCuadro&idCuadro=CF303§or=18&locale=en
- Banking and alternative financing sources to domestic private sector - (CF88) (Banco de Mexico): https://www.banxico.org.mx/SieInternet/consultarDirectorioInternetAction.do?accion=consultarCuadro&idCuadro=CF88§or=19&locale=en
- Mexico At a Glance (International Monetary Fund): https://www.imf.org/en/Countries/MEX
- Mexico profile – Timeline (BBC News): https://www.bbc.com/news/world-latin-america-19828041
- Mexico City: rental yields are moderately good (Global Property Guide): https://www.globalpropertyguide.com/Latin-America/Mexico/Rental-Yields
- House Hunting in Mexico: A Playa del Carmen Beach House for $750,000 (The New York Times): https://www.nytimes.com/2021/08/25/realestate/house-hunting-mexico-playa-del-carmen.html
- 4 Best Places To Buy A Second Home Overseas In 2019 (Forbes): https://www.forbes.com/sites/kathleenpeddicord/2019/01/18/4-best-places-to-buy-a-second-home-overseas-in-2019/?sh=1d29a1e179be
- Hot Spots: Top 30 Home Buying Destinations in the Americas (Point2Homes): https://www.point2homes.com/news/us-real-estate-news/us-top-30-home-buying-destinations-americas.html
- Representative interest rates (Banco de Mexico): https://www.banxico.org.mx/SieInternet/consultarDirectorioInternetAction.do?sector=18&accion=consultarCuadroAnalitico&idCuadro=CA51&locale=en
- Moody’s: Mexico’s non-bank finance companies targeting underserved markets (Moody’s):https://www.moodys.com/research/Moodys-Mexicos-non-bank-finance-companies-targeting-underserved-markets--PR_385989
- Rating Action: Moody´s downgrades Mexico´s ratings to Baa1, maintains negative outlook (Moody’s Investors Service): https://www.moodys.com/research/Moodys-downgrades-Mexicos-ratings-to-Baa1-maintains-negative-outlook--PR_422013
- Mexico: Economy gains steam in Q2 (Focus Economics): https://www.focus-economics.com/countries/mexico/news/gdp/economy-gains-steam-in-q2
- Open Banking for Inclusion (C Minds): https://www.cminds.co/unleashing-mexico-s-fintech-potenti
- Financial inclusion: Mexico plans a bank-building spree (Euromoney): https://www.euromoney.com/article/b1klktqwt9s9fy/financial-inclusion-mexico-plans-a-bank-building-spree
- Fintech Law Goes into Effect in Mexico (Debanked): https://debanked.com/2021/03/fintech-law-goes-into-effect-in-mexico/
- Mexico elections: President Amlo fails to win super-majority in midterms (The Guardian): https://www.theguardian.com/world/2021/jun/07/mexico-elections-midterms-amlo
- Approval Tracker: Mexico´s President AMLO (AS/COA): https://www.as-coa.org/articles/approval-tracker-mexicos-president-amlo
- Mexico Homicides Remained at High Levels Despite Pandemic (U.S. News): https://www.usnews.com/news/world/articles/2021-07-27/mexico-homicides-remained-at-high-levels-despite-pandemic
- Mexico still has the most violent cities in the world, but new hotspots are emerging (Business Insider): https://www.businessinsider.com/smaller-mexican-cities-now-most-violent-in-the-world-2021-5
- 2021 Mexico Peace Index: Key Data From This Year’s Report (Vision of Humanity): https://www.visionofhumanity.org/mexico-peace-index-2021-by-the-numbers/
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