Foreigners dominate the real estate market in Mexico

The U.S. housing market is quickly losing heat, but across the border, Mexico’s real estate shows no signs of slowing down. Vacation homes are especially popular with American buyers, which comprise the bulk of the market.

SOFTEC, a real estate consulting firm, reports that in the last three years there has been a 60% increase in vacation home investments. Many retirees are opting to buy property in Mexico, lured by cheaper house prices and lower cost of living.

Tourism, a major income generator, increases interest of foreigners in investing in Mexico real estate, and boosts the development of luxury homes, hotels, and resorts, mostly in coastal areas.

Canadian and European buyers have also been joining the market recently. The recent investment of Donald Trump in Baja, the Trump Ocean Resort prompted many to buy properties, banking on the inevitable price.

The Mexican government, under the new president Felipe Calderon, strongly supports real estate market expansion and tourism development. Foreign investment is much encouraged, backed by friendly laws. Foreign individuals can buy properties through bank trusts, called the fideicomiso system.

Unaffordable local housing

Aside from the focus on foreign investment, the government is continuing to help the local population buy houses by providing inexpensive housing. The government is pushing to make mortgages more affordable as well. For 2007, Calderon’s administration is set to grant one million mortgages.

The government-run financing institution INFONAVIT (Instituto del Fondo Nacional para la Vivienda de los Trabajadores) targeted to provide up to 750,000 mortgages in 2006. However, only 435,000 were successfully granted. The demand for mortgage financing last year was estimated at 900,000.

Banks entered the market again in 2004 after ceasing to grant loans since the 1994 crisis. In turn, private financing agencies called ‘sofoles’ dominated the market. Sofoles provide lower interest rates and can grant loans up to 25 years. These niche mortgage lenders can take assets from the informal economy through deposits.

Filling the deficit

There is still a huge housing deficit in Mexico today. The current deficit is estimated at 4.2 million homes. SOFTEC estimates the number of housing units in Mexico to be more than 28.4 million at the end of 2005.

Around 25% of housing units are built by large developers, such as HOMEX and PULTE. Two-thirds are self-built, and the remaining portion is built by smaller developers.

Small rental sector

Rental units comprise 13.5% of national housing, almost half in Mexico City and other larger cities, according to the CONAVI (Comision Nacional de Vivienda or National Housing Commission). This is an estimate of 2.9 million housing units.

It seems that the people who rent are those so poor that they are unable to buy the raw materials to build their own shanties. Since 70% of rental households have income below the minimum wage.

Middle segment houses are still 7% cheaper now than in 1994. Rents dropped by 13% between 1994 and 2001. They rose by 4.6% from 2001 to 2003, before falling again. Rents are still about 11% lower than their 1994 level.

Economic fundamentals

The rising demand for houses is based on economic and demographic fundamentals. Real wages have been growing by an average of 6.75% annually between 2000 and 2005. Unemployment is at 3.6%, down from 5.75% in 1995. Inflation has been tamed at 3.5% in 2006, from 35% in 1995.

Buyers have benefited greatly from the drop in short-term interest rates, from 48.2% in 1995 to 7% in the first half of 2006. Further reductions are expected in 2007.