Housing market remains healthy
Lalaine C. Delmendo | January 13, 2022
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:
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 moderate to good in Mexico City
The Gross rental yield is the rent the landlord will earn - before taxation, vacancy costs, and other costs - compared to the property's purchase price. Gross rental yields from houses in Mexico remain good.
In Jardines del Pedregal, one of the most expensive neighborhoods in Mexico City where there are luxurious properties and manicured gardens and which host some of Mexico's affluent families, a typical house costs around USD 364,022 and is rentable for a return of about 4.04%. While in Santa Fe, known for its historical architecture and one of Mexico City's central business districts, house prices cost around USD 377,485, with an average rental yield of 4.36%.
Del Valle is located in the neighborhood of Benito Juarez (which is considered to be the heart of Mexico City) and is essentially a residential area which the middle and upper-middle classes primarily occupy. A typical house in this area costs around USD244,842 and may yield a rental return of about 4.45%.
Bosques de las Lomas, Lomas de Chapultepec, and Polanco are highly-priced neighborhoods in the Miguel Hidalgo district. Rental returns in these areas range from 3.32% to 3.81.%.
Round trip transaction costs range from low to high for foreigners buying residential property in Mexico. See our Residential transaction cost analysis for Mexico.
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.
Economy recoveringDuring 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%.