Mexico's house prices likely to head down, as rates rise, violence escalates and Trump raves
August 02, 2017
During the latest quarter nationwide house prices increased by 0.58%, but actually dropped 2.24% in real terms.
Mexico’s housing market has enjoyed nominal growth for a decade, but the real (inflation-adjusted) numbers are prosaic:
- In 2009, house prices rose by 4.75% (0.77% inflation-adjusted)
- In 2010, house prices rose by 3.7% (-0.59% inflation-adjusted)
- In 2011, house prices rose by 5.9% (2.37% inflation-adjusted)
- In 2012, house prices rose by 2.9% (-1.15% inflation-adjusted)
- In 2013, house prices rose by 4.07% (0.39% inflation-adjusted)
- In 2014, prices increased 5.11% (0.84% inflation-adjusted)
- In 2015, prices increased strongly by 6.75% (4.36% inflation-adjusted)
- In 2016, house prices rose by 7.41% (4.07% inflation-adjusted)
The nationwide house price index rose by 5.16% during the year to Q1 2017, after y-o-y rises of 7.41% in Q4 2016, 6.7% in Q3 2016, 8.05% in Q2 2016 and 8.08% in Q1 2016, according to the SociedadHipotecaria Federal(SHF). However, when adjusted for inflation, house prices rose by a miniscule 0.17%, far from Q1 2016’s real growth of 5.26%.
Demand is falling. Urban housing transactions fell 6.1% y-o-y to 474,592 units in 2016, according to the Housing Finance Information Network (HOFINET).Construction activity is also slowing. Housing completions fell by 4% to 282,588 units in 2016.
The slowdown is greater from the perspective of foreign homebuyers, because of the peso's sharp depreciation. In 2015, Mexico's peso slumped against the US dollar by about 15%, the biggest annual decline since 2008. The peso depreciated by a further 9% from December 2015 to May 2017,to MXN18.7674 = USD1.
House prices are expected to be weak for the remainder of the year, given low confidence, the uncertainty about U.S. economic policies, and tightening monetary policy.
Mexico: 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.
In previous years we have found that rental yields in Mexico City were moderate, at between 4.9% to 5.4%. To buy a 120 square metre (sq. m.) apartment in an upscale area of Mexico City costs around USD 3,000 per sq. m., or USD 350,000 - a not unreasonable price.
This year we were able to find enough research results to establish reliable purchase prices, but not rentals. Sorry about that.
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.
Economy improvingThe Mexican economy grew by a modest 2.8% in Q1 2017 from a year earlier, up from 2.3% growth in the previous quarter, according to the InstitutoNacional de Estadistica y Geografia (INEGI). The country’s economic performance has been improving recently, but uncertainty remains over U.S. economic policies and the shape of the renegotiation of the North American Free Trade Agreement (NAFTA), expected to start in August.
The U.S. is the country’s main trading partner, accounting for US$303 billion or 81% of its total exports last year. Likewise, Mexico is the U.S.’ second largest goods export market in 2016, primarily importing machinery, vehicles, fuels, plastics, and agricultural products.
After a 4.7% GDP contraction in 2009, Mexico grew by 5.1% in 2010 as export demand picked up, specifically from the United States. This was followed by good years in 2011 and 2012 (both with 4% growth).
Mexico’s economy is highly dependent on the US, and in 2012, 78% of Mexico’s exports went to the US. 2013 was a disappointing year with 1.4% GDP growth, but in 2014 there was 2.3% GDP growth. The economy grew by a modest 2.3% last year, slightly down from 2.6% growth in 2015.
Mexico’s 2017 economic growth outlook was recently raised to a range of 1.5% to 2.5% by the central bank, Banco de Mexico, from the previous target of 1.3% to 2.3%, due to improving economic conditions. On the other hand, BBVA Research expects the Mexican economy to grow by 1.6% this year, citing three factors for its growth projection:
- Slowdown in private consumption growth;
- Weakness in gross fixed capital formation (GFCF); and
- Growth in export sector.
In May 2017, consumer prices rose 6.2% from a year earlier, up from 5.8% in the previous month and the highest since early 2009. This was also considerably above the central bank’s 3% to 4% inflation target for 2017.
Mexico’s unemployment rate stood at 3.6% in May 2017, slightly up from 3.5% in the previous month but down from 4% a year earlier, according to INEGI.