Mexico’s housing market remains healthy, despite ailing economy
Lalaine C. Delmendo | January 12, 2021
Enormous drug-related violence. Struggling economy. Corrupt political class. High interest rates. And now, the coronavirus pandemic. Yet Mexico’s housing market remains robust, with the nationwide house price index rising by 5.8% during the year to Q2 2020, according to the Sociedad Hipotecaria Federal (SHF). When adjusted for inflation, house prices increased 2.9% y-o-y in Q2 2020.
On a quarterly basis, house prices rose by 1.2% (1.7% inflation-adjusted) during the latest quarter.
By metropolitan area, Tijuana recorded the biggest y-o-y house price growth of 8.1% (5.2% inflation-adjusted) during the year to Q2 2020, followed by Guadalajara (8%), Puebla-Tlaxcala (7.1%), León (7%), Monterrey (6.8%), Querétaro (6.2%) and Toluca (5.8%). In Valle de México, house prices increased modestly by 2.9% (0.14% inflation-adjusted).
What’s even stranger is that this sudden takeoff of the housing market comes after Mexico’s housing market 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 2019, 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. In recent years, American and Canadian buyers have been returning 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 2019 Forbes article.
In the past year, the value of the Mexican peso (MXN) depreciated by 9.7% against the US dollar, to reach an average exchange rate of USD 1 = MXN 21.654 in September 2020.
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.
But economy wide, the story is different. The Mexican economy shrank by 0.3% in 2019, the weakest performance in a decade, due to 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 policies of President-elect López Obrador’s administration, as well as the US-China trade war.
Now, the coronavirus pandemic is making things much worse. In Q2 2020, the economy shrank by 18.7% from a year earlier, following a downwardly revised 1.4% fall in Q1. It was the biggest y-o-y contraction on record. Recently, the IMF revised its 2020 economic forecast for Mexico to a whopping 10.5% contraction, worse than its earlier estimate of a 6.6% decline.
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 49,500) 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 39,600) 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 39,600) 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 95,000) per sq. m. in Polanco, US$2,800 (MXN 55,400) in Lomas de Chapultepec and US$2,500 (MXN 49,500) in Bosque de las Lomas. Rental yields average between 3.3% and 4.2%.
Strong demand from foreign buyers
In recent years, American and Canadian buyers have been returning to Mexico, after a several-year slump, thanks to low oil prices and the strong US dollar, pushing home values up.
American buyers are very important as owners of beachfront properties. More than 1 million Americans live in Mexico, and more than 500,000 own homes in the country, according to a 2019 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 to heirs. 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 2019, 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 2019 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.
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 it is unsurprising for the deficit to increase sharply this year due to pandemic-induced spending. Recently, Fitch Ratings revised its budget deficit forecast for Mexico to 4.2% of GDP in 2020, an improvement from its earlier estimate of a shortfall of 5.9% to reflect stronger-than-expected revenues. Total public debt, domestic and foreign, stood at just 45.5% of GDP in 2019 but is expected to increase to a multi-decade high of 54.7% this year.
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 by 2020, 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.
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 118,800) to US$10,000 (MXN 198,000) per square metre (sq. m.), according to according to Carmella Peters Romero of Peters & Romero Bienes Raices. In Santa Fe, one of Mexico City’s modern districts, properties can be bought at U$2,000 (MXN 39,600) to US$ 4,000 (MXN 79,200) 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 29.7 million). Low-end three-bedroom homes can be bought starting from US$200,000 (MXN 3.96 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 9.11 million). In Playacar, a gated community of resort developments in Playa del Carmen, a four-bedroom luxury home lists for US$1.5 million (MXN 29.7 million).
In Tulum, another resort town located in Mexico’s Caribbean coast, a two-bedroom townhouse in the exclusive gated community of AldeaZamá can be bought for below US$500,000 (MXN 9.9 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 4.95 million) last year. Apartments in the area had an average price of US$240,000 (MXN 4.75 million).
Mortgage rates remain high despite falling key rates
Mortgage interest rates remain high. The average interest rate for mortgage loans offered by banks and Sofoles was 12.55% in August 2020, down from 13.26% in the previous year. Mortgage rates in Mexico range from 9.3% to 17.07% in August 2020.
This is despite the central bank, Banco de Mexico (Banxico), cutting its key rate by 25 basis points to 4.25% in September 2020, the eleventh consecutive rate cut in just thirteen months, 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 10.6% of GDP in 2019, just a bit higher than 9.6% of GDP a decade ago. Mortgage lending from non-banks accounts for 64% of all mortgage loans.
In Q2 2020, the total value of mortgage loans outstanding rose by 5.7% y-o-y to MXN 2.71 trillion (US$123.2 billion), following annual rises of 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 9.4% y-o-y to MXN 979.15 billion (US$44.5 billion)
- Non-banks: mortgage lending rose by 3.8% y-o-y to MXN 1.73 trillion (US$78.6 billion)
“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.
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.
Bleak economic outlook
The Mexican economy shrank by 0.3% in 2019, the weakest performance in a decade. This can be attributed to 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) and 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 form the prior government’s opening of the oil and gas industry to private capital.
Moreover, the ongoing US-China trade war has also adversely affected the Mexican economy.
Now, the coronavirus pandemic is making things much worse. In Q2 2020, the economy shrank by 18.7% from a year earlier, following a downwardly revised 1.4% fall in Q1. It was the biggest y-o-y contraction on record.
During the year to Q2 2020:
- Industrial activity, with accounts for almost one-third of the economy and is very dependent on US demand, plunged 25.7%, after a 2.6% drop in Q1.
- The services sector and related activities, which accounts for about 60% of the economy, contracted by 15.6%, far worse than the previous quarter’s 0.7% fall
On a quarterly basis, the Mexican economy slumped 17.1% in Q2 2020, after contracting by 1.2% in the previous quarter.
Recently, the IMF revised its 2020 economic forecast for Mexico to a whopping 10.5% contraction, worse than its earlier estimate of a 6.6% decline.
All three major ratings agencies have downgraded Mexico this 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.
Unemployment stood at 5.2% in August 2020, down from 5.4% in the previous month but still the far higher than the pre-pandemic jobless rate of 2.9%, according to INEGI.
Consumer prices were up by 4.05% y-o-y in August 2020, up from the previous month’s 3.62% and slightly above the central bank’s target range of 2% to 4%.
Politics, drugs and corruption
Two years after winning a landslide victory during the July 2018 general elections, Andrés Manuel López Obrador (famously called AMLO) of the left-wing National Regeneration Movement (MORENA) has announced plans for a referendum on whether to investigate and possibly bring charges against his five predecessors, alleging they allowed massive theft on public coffers over decades.
“Mexico experienced a period characterised by excessive concentration of wealth, monumental devastation to the treasury, privatisation of public goods, general corruption, foul electoral processes, and governing practices that led to uncontrolled growth of violence,” AMLO said. “The social and humanitarian disasters we have suffered in this country over the last 30 years were the result of a series of conscious acts by those who governed during this period.”
While the move could serve as a deterrent to future leaders from succumbing to corruption temptations, critics argue that the plebiscite, which will be held along midterm elections on June 2021, is just a way to divert attention from contentious issues such as the flagging economy, the government’s handling of the pandemic, and the persistently high level of gang violence and killings.
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 party, MORENA, also dominated the election, taking 55 seats in the senate while its coalition partners the Workers’ Party (PT) and the Social Encounter Party (PES) won 6 and 8 seats, respectively. This makes the MORENA coalition an absolute majority in the senate, controlling 69 of 128 seats. In the Chamber of Deputies, the coalition got a total of 306 seats out of 500.
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 138.6 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 which returned the PRI to power in 2012.
However, violence has in fact climbed to new highs recently. As opposed to Calderon’s policy of arresting or killing the country’s drug lords, former president Nieto’s rhetoric focused on lowering murder rates, kidnappings, and extortions.
Despite all of these, the number of homicides in Mexico surged to historic high in the past two years. In 2019, Mexico registered 36,476 homicides, almost at par with the prior year. In fact, the murder rate reached its highest level last year, averaging 95 murders per day.
Then in the first eight months of 2020, there were 24,116 homicides in Mexico, up about 1.5% from 23,760 cases in the same period last year.
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. Almost half of the homicide cases every year occur in Baja California, Durango, Sinaloa, Chihuahua and Guerrero, according to the SSP (Secretaría de SeguridadPublica or Public Security Ministry).
- SHF Index of Housing Prices in Mexico 2015 – 2020 (Gobierno de Mexico): https://www.gob.mx/shf/documentos/indice-shf-de-precios-de-la-vivienda-en-mexico-2015-2020
- Real Estate Market Report 2020 (Lamudi): https://www.lamudi.com.mx/reporte-del-mercado-inmobiliario-2020/
- Household Credit Interest Rates - (CF303) (Banco de Mexico): https://www.banxico.org.mx/SieInternet/consultarDirectorioInternetAction.do?accion=consultarCuadro&idCuadro=CF303§or=18&locale=en
- Mexico City: rental yields are moderately good (Global Property Guide): https://www.globalpropertyguide.com/Latin-America/Mexico/Rental-Yields
- 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/#342fd4e079be
- 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
- 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
- Representative interest rates (Banco de Mexico): https://www.banxico.org.mx/SieInternet/consultarDirectorioInternetAction.do?sector=18&accion=consultarCuadroAnalitico&idCuadro=CA51&locale=en
- Hot Spots: Top 30 Home Buying Destinations in the Americas (Point2 Homes): https://www.point2homes.com/news/us-real-estate-news/us-top-30-home-buying-destinations-americas.html
- World Economic Outlook Database, April 2020 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2020/01/weodata/index.aspx
- Stumbling angel? Mexico risks losing investment grade credit rating (Reuters): https://www.reuters.com/article/us-mexico-bonds-idUSKBN23F1B0
- Mexico Maintains Tight Fiscal Stance, Erodes Oil Fund Buffer (Fitch Ratings): https://www.fitchratings.com/research/sovereigns/mexico-maintains-tight-fiscal-stance-erodes-oil-fund-buffer-29-09-2020
- Under pressure the squeezed middle class: how does Mexico compare (OECD): https://www.oecd.org/mexico/Middle-class-2019-Mexico.pdf
- Open Banking for Inclusion (C Minds): https://www.cminds.co/unleashing-mexico-s-fintech-potenti
- Countries With The Largest Populations Without Bank Accounts (World Atlas): https://www.worldatlas.com/articles/countries-with-the-largest-populations-without-bank-accounts.html
- Financial inclusion: Mexico plans a bank-building spree (Euromoney): https://www.euromoney.com/article/b1klktqwt9s9fy/financial-inclusion-mexico-plans-a-bank-building-spree
- Mexico and the Gods of Corruption (The New York Times): https://www.nytimes.com/2020/09/29/opinion/international-world/mexico-corruption-lopez-obrador.html
- Mexico: President requests referendum on judging predecessors (Al Jazeera): https://www.aljazeera.com/news/2020/9/15/mexico-president-requests-referendum-on-judging-predecessors
- Mexico Homicide Rate Remains High at 29 Per 100,000 (US News): https://www.usnews.com/news/world/articles/2020-09-24/mexico-homicide-rate-remains-high-at-29-per-100-000
- Mexico murder rate hits record high in 2019 (Al Jazeera): https://www.aljazeera.com/news/2020/1/21/mexico-murder-rate-hits-record-high-in-2019
- Mexico Reports Slight Decline in 2019 Homicides (The Wall Street Journal): https://www.wsj.com/articles/mexico-reports-slight-decline-in-2019-homicides-11600880465
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