How Mexico's Housing Sector is Creating Islands

Verticalization is the buzzword of the year among residential developers. But if the 2014 National Housing Plan created by SEDATU and CONAVI was meant to bring people back into the cities and contain urban sprawls, why are people continuing to move to travel an average of two hours to reach their job?

Mexico’s 10 largest cities are Mexico City, Ecatepec de Morelos, Guadalajara, Puebla, Cuidad Juarez, Tijuana, Leon, Zapopan, Monterrey and Ciudad Nezahualcoyotl. Eight of these cities are the motors that drive Mexico’s economy and are home to the country’s most important industries. Two are the result of exponential growth, lack of space and rising home prices. Cuidad Nezahualcoyot and Ecatepec de Morelos have a combined population of more 2.8 million people and form part of the Valley of Mexico Metropolitan Area (ZMVM).

The urban sprawl surrounding Mexico City has grown so much that it has eaten up various states and municipalities around it. The ZMVM includes 60 additional municipalities from the State of Hidalgo and the State of Mexico, which together have more than 20 million citizens. Of these, only approximately 9 million live in the actual city and the remaining 11 million live in the 60 other municipalities, such as Ecatepec and Nezahualcoyot. According to INEGI’s 2010 housing and population survey, of every 100 Mexicans, 52 moved from Mexico City into the State of Mexico and in INEGI’s Intercensal Survey in 2015, more than 545,284 migrated out Mexico City.

MONEY TALKS

According to INEGI’s National Occupation and Job Survey, more than 24 million workers earn less than MX$5,000 a month. Mexico’s minimum wage continues to be just MX$80.04 a day with exhausting working hours that are among the highest in the world. With that in mind, Mexico City (MX$1.53 million) Queretaro (MX$1.45 million) and Morelos (MX$1.21 million) are the three states with the most expensive average when it comes to housing prices. When compared to the national average as of 2Q17 of MX$744,943, according to Federal Mortgage Society (SHF), the concept of bedroom cities begins to make more sense.

Mexico City’s most attractive delegations are Alvaro Obregon, Cuajimalpa, Miguel Hidalgo, Benito Juarez and Cuauhtemoc, at an average price between MX$22,000-40,000 per m2, an 86 percent increase from 2012-2017. By using CONDUSEF’s credit simulator, for a nonaffiliate of Infonavit, the lowest monthly payment for a mortgage loan would be MX$8,630.85 from Santander for a house of a value of MX$1.02 million. To qualify for the loan, the applicant needs a minimum income of MX$20,135.18 a month and after 15 years the total amount paid will be MX$1.9 million.

For an Infonavit affiliate, the monthly payment would fall to MX$6,363.02 a month and a monthly income of MX$14,654.31 would be required to qualify for a loan for a MX$750,000 house. With a MX$1.02 million mortgage loan, a person could purchase a home of 46.3m2 or a 25m2 apartment in the central delegations in the city. This does not take into account the luxurious apartments in Miyana in Polanco or in Santa Fe, where apartments start at MX$8 million for a two-bedroom unit.

Another factor keeping people away from cities is a change in demographics. “There are almost 50,000 people living in Mexico City who are getting married and 10,000 divorcing each year,” says José Shabot, Executive President of housing developer Quiero Casa. “They need housing and when they cannot find affordable and decent housing, they move to the outskirts, making the existing mobility problems a bigger challenge.”

It is no wonder people are migrating to the State of Mexico. Ecatepec de Morelos has an average price of MX$7,413 per m2, which means a 60m2 apartment would cost only MX$444,780. While the cheapest apartment according to Quiero Casa in Mexico City has a price tag of MX$600,000, and the size and safety of the apartment is almost always compromised. Ecatepec de Morelos and Cuidad Netzahualcoyotl also happen to be some of the most dangerous areas not only in the ZMVM but also in the entire country.

OTHER CITIES MUST BE CHEAPER

For five years in a row, Nuevo Leon continues to be the state with the greatest level of housing development in the country, according to Realty World Mexico. Nuevo Leon developed more than 69,535 homes in 2016, followed by Jalisco with 55,945 and Quintana Roo with 32,440 homes. Prices in Monterrey have also increased along with production. In the first quarter of 2017, the price of housing has increased 5.18 percent in comparison to 1Q16, with an average price of MX$744,943, according to SHF. Monterrey was the city with the highest increase, with 5.83 percent in comparison to 4.50 percent in Mexico City and 4.34 percent in Guadalajara.

Just like in Mexico City, Monterrey’s urban sprawl has caused municipalities to mix and now the most populated areas in Nuevo Leon – Guadalupe, Apodaca, Santa Catarina, General 

Zauzua and General Escobedo and Juarez – have turned into the Metropolitan Zone of Monterrey. The phenomenon repeats, with high housing prices and the need to commute for more than two hours to reach places of work.

San Pedro Garza Garcia is the one of the most expensive cities in Mexico, with a price per square meter of MX$38,312.95. To live at a decent distance from their jobs, people would need to pay approximately MX$2.3 million for a 60m2 apartment. “Many people that work in San Pedro Garza Garcia live in other housing developments with an average price tag of MX$2-4 million,” says Marco Garza, Founding Partner at GM Capital. “Typically, they cannot afford the high-priced homes, education and costs of living in the neighborhood where they work.” People want to live closer to where they work and play, driving the construction of housing back into urban areas.

Developers in Monterrey also believe that mixed-use developments could be the cure to the city’s problem. As of 4Q16, there were 24 mixed-use developments, seven under construction, and it is projected that there will be nine new projects in 2017. But with such exorbitant prices and the average income of Nuevo Leon being MX$7,962 a month in 1Q17, it is out of reach for most families. “The San Pedro Garza Garcia market is a little saturated and Monterrey has other submarkets that are gaining traction,” says Carlos Rousseau, Senior Partner and Co-Founder of Orange Investments. “The more rural areas of Monterrey are beginning to see further commercial developments, mixed-use projects and shopping malls being built. I think in the future, we will start to see a big movement toward Monterrey’s downtown.”

IS MIXED-USE REALLY THE CURE?

Mexico’s cities are only beginning to build upward. Verticalization is slowly taking over the housing sector, but of the 2,586,438 households in INEGI’s 2016 National Housing Survey, only 818,661 (31 percent) live in an apartment complex, and 1,725,214 (66.7 percent) live in an independent house in Mexico City. The number of people living in an apartment increased 1.8 percent and the number of people living in an independent house decreased 1.3 percent from 2014-2016.

Residential developers in Mexico believe it is a slow but sure transition. “By 2025, millennials will represent approximately 75 percent of the country’s workforce,” says Marcelo Rodriguez, Director General of Grupo Proyecta. “Currently, there are more than 30 million millennials living in Mexico between the ages of 21 and 34 who will be looking to either rent or buy housing in the coming years.” New generations want to live closer to their everyday activities, but the current housing and mortgage prices do not match the salaries of recent graduates.

The 2014-2018 National Housing Policy wants to bring people back into the cities, but are the right mechanisms in place to ensure that the cities are inclusive? Mixed-use developments are on the right track, but they are not affordable for the majority of the population. “The problem with sprawls appears when it does not come from a natural process, but from a commercial condition artificially created by the government or developers, mainly due to economic efficiency motives and speculation, even when there is no need for it,” says Gabriel Ballesteros, Partner at Ballesteros Mureddu. “If the expansion of the city does not come from a growing process that respects the contiguity of the city, then it creates new spaces whose value will grow within the speculation process.”

Mexico City’s new Housing Law is a ray of hope for creating decent and inclusive living conditions within the city. It will allow the use of government land to make more housing developments and has new codes that will grant developers new conditions and incentives. For instance, if developers are building for Infonavit or Fovissste, they will be allowed to build more stories, further verticalizing the city. “Combining these new policies will make land cheaper and in turn will create lower prices for the end consumer,” says Shabot. “This will help provide apartments to not only middle class, but also to people who are below middle class. Our homes are within the range of MX$600,000-2.5 million and our average price is MX$1.5 million. But if land becomes cheaper, then we would be able to lower the price at least by MX$100,000 in some of our segments.”