The Tale of Two MexicosThu, 11/01/2018 - 15:39
The tale of the two Mexicos describes the country’s two-speed economic growth and how these different economies are pulling the country in different directions, creating a gap in living standards. The housing sector is no different. Magazines, developers and speakers at events and conferences highlight the actions of the Fibras and the opportunities within the high-end segment, which are attracting investment. But we are forgetting the much larger, second Mexico.
The housing market is segmented into two. The first segment includes the buildings developed for and by the Fibras; the other includes the homes constructed by developers. In Mexico, almost 1 million homes are constructed each year, of which 35 percent are constructed by licensed developers and the other 65 percent are constructed on crowded plots. Around 180,000 are built using materials such as sheet steel and bricks. This creates a great deal of opportunity in the MX$1.5 million and below demographic outside the ZMVM, or for the MX$2.5 million and below market within ZMVM.
Mexico has been able to develop so many homes each year in most part because former President Luis Echeverria created INFONAVIT. INFONAVIT made it obligatory for company owners to contribute 5 percent of the worker’s salary to create a housing fund that would bolster his or her ability to purchase a home. INFONAVIT collects approximately MX$150 billion through this fund for the purchase or improvement of housing. It is prepared to sign 10,000 loans weekly for the purchase of a home and finances more than 500,000 homes a year.
The government then created FOVISSSTE, which is a fund in which the federal government and other entities contribute resources so that their workers can also receive loans. The average loan INFONAVIT provides is between MX$350,000 to MX$380,000, which are for small homes. But FOVISSSTE provides higher loans, on average MX$600,000, which allows for the purchase of bigger, more valuable homes.
In 2016, banks provided the most housing loans to the population but the rate has decreased since then. Banco Inmobiliario Mexicano has funded housing development since 2009 and in the beginning, we operated with money from SHF and 65 percent of our funds had to be allocated to social housing. That has changed throughout the years and now we allocate 40-45 percent to social housing, approximately the same for middle housing, and 10-15 percent for middle residential housing. It is difficult for commercial banks to compete with INFONAVIT and FOVISSSTE. INFONAVIT can provide loans at 4-6 percent rates. Although the banks provide affordable rates for middle-class housing, those are still above 9 percent.
Some developers are now putting their projects on hold to see what path the sector will take after Andrés Manuel López Obrador (AMLO) takes charge. He certainly faces many challenges but I believe some far-reaching solutions would be to introduce vertical housing on a broad scale in the suburbs, convince banks to provide loans and mortgages to the informal economy and increase the scope of social housing subsidies. Thanks to FOVISSSTE and INFONAVIT, the country’s housing deficit has decreased, but now it is necessary to examine the kind of housing that is provided. To create more social housing, we must develop alternative cities that may be farther away from the main cities but with more affordable prices. But before developing new cities, the country must first ensure that they are well-connected and walkable, or with a robust transportation system to interlink each city.
Although all this sounds like a challenge, in reality it is an opportunity. Even though Mexico constructs more homes than any other country in Latin America, including Brazil, the housing deficit is decreasing at a slow rate. There is a gap in Mexico of between 8-9 million houses. At 11.2 percent, investment in mortgage credit is lower in Mexico as a percentage of its GDP compared to similar economies such as Chile with 23 percent or Brazil with 35 percent, not to mention Canada and the US. By 2025, Mexico’s GDP is expected to grow to MX$40 trillion and our goal is to reach 20 percent of GDP in mortgage credit, which would equate to MX$8 trillion. Considering 2017 mortgage credits reached approximately MX$3.47 trillion, this means a MX$4.53 trillion opportunity for housing over the next six years.