Despite ailing economy, Mexico remains healthy
Lalaine C. Delmendo | February 05, 2021
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:
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 LópezObrador'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.
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.
Bleak economic outlookThe 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 LópezObrador’s administration. Investor confidence has been upset by some of LópezObrador’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%.