By Mexico Insight
Mexico’s realty market has not escaped the world-wide downturn in property prices, which has been led in good part by the contraction of available mortgage credit and falling stock market values. However, Mexico’s downturn has not been as deep or as severe as the one in the USA, and much less so than in places like Spain—and there are specific reasons for that.
Mexico’s property ‘boom’ was never as large as that of its US neighbor, or its former colonial master. Credit has become widely available to the middle and upper classes in Mexico—but mostly in the form of consumer credit: plastic cards and loans for new cars. Mortgages were virtually unavailable in Mexico before the 1990’s, and once they appeared mortgage interest rates have never been low. Even today, the best deals on the market demand interest rates of around 11% per annum and, when you add account aperture fees, commissions, and required minimum deposits of 15-25%, the market of potential mortgage holders diminishes further. Extremely low interest rate mortgage loans, “teaser” rates, no-fee arrangements, etc. never came to pass in Mexico.
Residential building projects aimed at foreign investors did flourish in Mexico starting in the 90’s—but never on the scale that they did in Spain. The Spanish realty market, fueled by cheap money from the Euro zone and Britain (Germans and Brits were principal buyers there), boomed and developers obliged by throwing up apartment blocks as fast as they could mix the cement, and as if tomorrow would never come. Today it’s reported that there are some 800,000 (eight hundred thousand) residential dwelling units in Spain lying empty, unsold, or weighing down on bank’s repo inventories.
Mexico has experienced property booms and busts of its own. However, it was not a contraction of credit that caused its housing busts, but macroeconomic issues related to the structure of its economy and the value of its currency. Since Mexico floated its currency in the mid 90’s, the peso has enjoyed remarkable stability. The most recent property ‘bubbles’ in Mexico have been brought about by cheap dollars funding property in Mexico (usually through remortgages on foreign property) and more often, foreigners trading down in their home country and using the surplus cash to buy land or a small home in Mexico. Moreover, these ‘bubbles’ have been localized in their nature. For example, small rural towns whose local economies would never have supported steep rises in land and property values, were ‘discovered’ by foreigners and experienced unprecedented levels of foreign property investment; and even well-known coastal areas—Puerto Vallarta is a prime example—experienced truly massive capital inflows which drove realty prices upwards.
Many of these purchases were left largely unaffected by the credit crisis, because the sales were completed using monies which had been generated from the sale of assets abroad, i.e., many of the properties owned by foreigners here are not mortgaged. The peak in prices came at the point just before the market turned sour in the USA; which also marks the point when capital inflows destined for Mexican residential properties, principally derived from foreign asset sales, began to decline.
The corollary is a re-balancing process that is happening now, but what is not being seen here is the wholesale collapse of the Mexican property market—and that’s in good part because owners are not being forced to bring about stressed sales and the rental markets here remain buoyant.
The latest situation does, however, require existing owners—and prospective new owners—to take a long-term approach in regard to their residential property investments here. If you enter the market now hoping to sell for a profit in a year or two, you’re probably going to be left disappointed.
Mexican real estate continues to offer excellent value for money—especially along the coasts. In the USA, coastal property markets are effectively closed to all but the wealthy, whereas in Mexico you can still buy coastline property for under US$300,000. And further inland, in Mexico’s colonial towns and cities, prices remain very affordable and you can pick up a small home in need of some care for less than US$50,000. Prices are in flux and, as we have commented before, the price of Mexican property is a very localized matter and dependent more upon what a seller demands and what a purchaser is willing to pay, and far less upon any official data and statistics.
There is another important reason why Mexican property remains an attractive investment: the total cost of ownership remains very low. Property taxes, even with recent rises, remain significantly and materially lower in Mexico than they are in places like the USA, Canada and Western Europe. Property construction costs are low, and ongoing maintenance costs are low, too. Ed Kunze’s eBook, Build or Buy Your Home in Mexico, demonstrates in great detail how this is so, and how you can get so much more for every dollar invested in Mexican property.