Mexico's housing market strengthens, despite struggling economy
Lalaine C. Delmendo | November 02, 2019
On a quarterly basis, house prices rose by 2.44% (2.31% inflation-adjusted) during the latest quarter.
What's even stranger is that this sudden take-off 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 2018, 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's recent Real Estate Market Report 2018.
Foreign demand is also rising again. American and Canadian buyers are returning to Mexico, after a several-year slump, thanks to low oil prices and the strong US dollar, pushing home values up.
The Mexican housing market is not driven by speculators. There are many developers, and it is highly competitive. Interest rates are (relatively) low in the social sectors, due to subsidies. Housing demand in Mexico is "real", says Citibanamex's Executive Director of Mortgage and Automotive Credit Ricardo García Conde, meaning that the house price movements in Mexico are mostly due to supply and demand with a minimum percentage of speculative purchases.
While the general outlook for Mexico's housing market remains robust, the country's ailing economy, coupled with the uncertainties surrounding the ratification of NAFTA (now rebranded as USMCA) and the ongoing US-China trade dispute, might adversely impact the market in the coming months.
Contrary to President Andrés Manuel López Obrador's promise to deliver 2% growth this year, the Mexican economy actually shrank by 0.4% in Q3 2019 from a year earlier, following a y-o-y contraction of 0.8% in Q2 2019 and a growth of 1.2% in Q1. As a result Banco de Mexico (Banxico) recently slashed its 2019 economic growth forecast to about 0.2% to 0.7%, down from its earlier projection of between 0.8% and 1.8%.
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 expanded by 2% in 2018, the lowest level in five years, according to the International Monetary Fund (IMF), mainly due to the uncertainties brought by the July 2018 elections.
Contrary to López Obrador’s promise to deliver a 2% growth this year, the Mexican economy actually shrank by 0.4% in Q3 2019 from a year earlier, following a y-o-y contraction of 0.8% in Q2 2019 and a growth of 1.2% in Q1, based on preliminary figures released by INEGI.
During the year to Q3 2019:
- Industrial activity, with accounts for almost one-third of the economy and is very dependent on US demand, declined by 1.7%
- The services sector and related activities, which accounts for about 60% of the economy, contracted by 0.1%
- The agricultural sector expanded by 5.4%
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 are affecting investment. 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 is also adversely affecting the Mexican economy.
“Viewed as a whole, we can say that the Mexican economy is stagnating, as its nonexistent growth so far this year confirms, in a climate where a negative bias prevails given economic, political, national and global uncertainty,” said Scotiabank.
Banxico recently slashed its 2019 economic growth forecast for Mexico to about 0.2% to 0.7%, down from its earlier projection of between 0.8% and 1.8%.
Unemployment stood at 3.5% in September 2019, up from 3.3% a year earlier, according to INEGI. Consumer prices were up by 3% during the year to September 2019, down from last year’s 5.02% inflation and at par with the central bank’s target.