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Published by the CIPS Network of the National Association of REALTORS®
Fourth Quarter 2004
Mexico Prepares to Meet Future Housing Demands
Excerpts from “The State of Mexico’s Housing 2004,” Executive Summary
Reprinted with permission by the Joint Center for Housing Studies of Harvard University. All rights reserved.
Mexico is at a crossroads. Restoration of macroeconomic stability and economic growth, coupled with strong commitment to housing reforms, provides the nation with a unique opportunity to improve its housing conditions and meet increasing demand. It also presents unique opportunities to use housing as a tool for economic and social development.
But the road ahead is challenging. Housing finance is available almost exclusively for
new construction and directed mostly to formal private sector and public sector workers with modest wages. As a result, the majority of the population must rely on
self-financing strategies to build or consolidate self-built housing, to purchase developer-built housing, or to purchase existing housing. Fifty percent or more of all new homes are self-built by low-income households and large shares of these are built on land without clear title and often without basic infrastructure and services. Similarly, a large share of the standing stock has uncertain legal status and is served by less than adequate infrastructure.
Meanwhile, broader geographic dispersion of economic growth than in the past has
created demand for more infrastructure, planning, and information on housing markets at the municipal level. Making matters more challenging, intergovernmental cooperation to finance and coordinate an infrastructure is uncommon and there is little consistency or continuity in local land use planning practices. Expanding production is a goal of both government and private sector actors. Over the last three years, housing production and investment has increased nearly 45 percent, according to CONAFOVI (Comision Nacional de Fomento a la Vivenda). Addressing the underlying challenges to the housing sector is essential to support continued investment.
Five Key Steps To Housing Progress
All these challenges must be addressed to advance housing’s role in social and economic development. Future progress depends particularly on the following five actions:
- extending housing finance to more segments of the population;
- encouraging housing production within the legal framework;
- improving land and infrastructure planning and finance;
- facilitating trades within a working secondary housing market;
- collecting better information on housing and mortgage markets.
Both industry and government leaders recognize that these steps form the path that
must be taken to meet the housing needs of the people of Mexico. Extending the housing finance system depends on leveraging available capital and mobilizing capital from additional sources. That in turns depends on improving the capacity of financial institutions to measure and manage risk, which requires both better information on risks and the ability to take control of underlying housing assets in the event of borrower default. Leveraging public capital effectively also requires coordination among publicly mandated agencies. Much of the lending done by publicly mandated agencies involves extending whole loans rather than insuring loans, guaranteeing pools of loans, or co-mingling funds, all of which could help stretch limited funds further and leverage more private capital.
Trying to create a system by which creation of new settlements is done on a legal basis, as well as regularizing settlements that now have uncertain legal status, is critical because until this is done the stock of wealth held in much of Mexico’s housing cannot be tapped to finance consumption and investment. That wealth has been estimated at over one trillion pesos.
Facilitating an active secondary housing market allows households to realize accumulated wealth built up as equity in their homes, encourages mobility based on labor market and life cycle changes, and provides critical information on housing markets through [the recording of] sales transactions. Until this is done, wealth in the form of housing cannot be liquidated and used by households to trade up to better housing or to finance other consumption and investment.
Improving the physical infrastructure and land planning is vital because the quality of housing depends on sanitation, water, and access to transportation and utilities. Builders need greater certainty in the development process to contain costs and manage risks. Communities need better planning because settlement takes place spontaneously and illegally where it is not planned and channeled. Once developed, that spontaneity makes integrating communities into the fabric of the municipal area and into an efficient transportation system costly and difficult. It also adds to the cost of extending services.
Finally, information is vital because it is the basis for improving risk management and prudent decisions by financial institutions, government agencies, builders, developers and consumers. To expand the amount of credit and extend housing and mortgage markets, Mexico needs better information on ownership of land, the value and legal status of its existing stock, the payment history of its citizens, the financial
performance of financial intermediaries, the financial performance of mortgage loans, the value of homes bought and sold in the market, the supply of new homes under construction and completed but not yet sold, the demand for new housing, the costs of providing infrastructure, and best practices in land use planning and infrastructure finance.
Housing and Housing Markets
Mexico’s housing stock consists of about 24 million units, with an estimated value of more than 1.1 trillion pesos (about 110 billion USD). Less than 13 percent of housing units have outstanding mortgage debt; thus a significant store of home equity is untapped. Even though the vast majority of units are in the lowest price ranges, much of the value of the housing stock is concentrated in the small fraction of higher cost homes. In a very real sense, much of Mexico’s savings, especially among those with low incomes, is embodied in the materials used to build their homes and the value of the land underneath it. Tapping into that savings requires access to home equity loans as well as to loans to buy existing housing.
Roughly half of all new housing—approximately 300,000 units per year—and about two-thirds of existing homes are self-built. A substantial fraction of self-built and a portion of developer-built units are in poor condition and require significant upgrading. Measures of housing quality are scarce and incomplete even for formally built units.
The informal housing sector consists of housing that is self-built, lacks clear title and formal connections to urban services, and is financed through cash or informal loans. Data on selfbuilt houses, such as the number and location of existing units, the proportion that has been retro-fitted with urban services and granted clear title, and secondary sales of these units, is incomplete and difficult to find. Most information is based on extrapolation from partial surveys or interviews.
The secondary housing market is quite small, and the main publicly mandated agencies have historically imposed rules that restrict the operation of documented resold housing transactions. Hence, housing is an extremely illiquid asset and appreciation in home values is seldom realized through capital gains on sale.
About 13 percent of households rent, although the share renting may be underestimated because owners of rental housing may not report the income received.
The greatest absolute demand for housing comes from the four largest cities (Mexico City, Monterrey, Guadalajara and Puebla), but rates of growth are increasing especially among midsized cities along the U.S.-Mexico border and coastal tourist areas.
Based on the income distribution, the majority of demand is for housing in the lowest three market segments—minimum, social and economic—but the fastest growing segments are economic and middle.1 An indeterminate but certainly large number of low-income households are likely to require up-front subsidies in order to afford housing.
The small scale of construction in rural areas (locations with population under 15,000) makes it uneconomic for developers to meet housing demand in these areas.
Limited information on local demand and on the allocation of publicly mandated loans
below the state level creates local imbalances between supply and demand. Although there is clear need for new housing in virtually every market, the geographic distribution of housing finance limits the translation of potential demand into effective demand (conversion of households with interest in buying a home into households with the financial capacity to purchase a home by getting loans). Particularly given the transition to borrower-based rather than developer-based loans, this may result in some local excess supply as developers try to anticipate how many homes they can sell.
In summary, housing markets operate mostly in the purchase and sale of new housing, in self-built housing, and to a much more limited degree in the relatively small rental sector. Mobility is limited, and what mobility there is may be concealed to avoid taxes and fees or to conform to agency rules. Demand is primarily concentrated in the lower end of the market and large urban areas.
A Vision For the Future
Mexico is engaged in a process of reforming its housing system to meet the challenges that lay ahead. As Figure 1 illustrates, collectively, the reforms should expand and diversify the housing finance system, leading to more sources of capital (particularly private capital), more conduits through which capital can flow, and a more diverse range of final housing products. Much attention has been focused on President [Vicente] Fox’s goal of 750,000 new houses built per year. More broadly, a transformed housing finance system could finance nearly one million loans per year, for new and existing finished housing, progressive housing development, improvements to existing housing, and the purchase of rental properties for investment.
An important component of the transformation is the ability to tap into the equity already present in Mexico’s extensive stock of current housing. As Figure 2 shows, currently, new housing enters the stock in the top two boxes from formal new construction and the bottom box from self-built housing, while older formally built units can filter down in value (box 1 to box 2) and the regularization of informal settlements is essentially a filtering up (box 4 to box 3). One of the long-run goals should be to eliminate the future development of illegal irregular settlements. By providing legal opportunities for progressive housing and enforcing land use planning, such new development could be channeled directly into the self-built but regularized stock (box 3). Moreover, with greater ability to trade existing housing, households could move up the housing ladder as their income and wealth increase. By legally selling their current home and realizing capital gains on the asset, households could obtain a down payment on a larger, newer, or otherwise preferable house (or alternately, use the liquid gains to finance current consumption). Currently, without the ability to assess the value of existing housing, to borrow against it or to resell it, housing wealth cannot be fully realized and households are limited in their upward and geographic mobility.
Action Agenda
The housing sector in Mexico is undergoing a remarkable transformation, aided by favorable economic conditions, innovative leadership of key organizations, and supportive political will. However, Mexico’s housing system faces several difficult challenges, including insufficient information to make necessary policy and investment decisions. In order to address these challenges, we recommend that a group of industry experts drawn from the public and private sectors convene a regular series of forums and produce an annual report on the state of Mexico’s housing.
Convene Regular Forum and Produce Annual Report
Holding a regular forum, open to policymakers, industry constituents, academic institutions, advocacy organizations and the general public will enable discussion of the critical issues facing the housing sector. Specific purposes of such a forum would be to present new information that fills some of the data gaps listed above; to identify and investigate broader topics of interest or concern; and to engage in frank discussion of critical issues.
Public-Private Partnership to Oversee Action Plan
In 2001, President Vicente Fox created the National Housing Action Council, a body composed of 50 board members, appointed by the President, with expertise and interest in the housing sector. All major organizational stakeholders in the housing industry are represented on the board. Besides the federal and state housing-related government agencies and municipal governments, the board includes developers, homebuilders, private mortgage lenders and academics. The Council members meet quarterly, with the President or his chief of staff to chair the meetings. In addition members are assigned to four working committees that deal with Financing, Productivity, Market Growth and Land and Infrastructure. Research and staff support for the Council are provided by CONAFOVI.
The existence of an umbrella organization drawn from both public and private sectors with such diverse membership and wide-ranging knowledge of the housing sector provides an invaluable resource for the types of sustained conversations and dissemination of information recommended in this report. Any efforts to coordinate the forum and produce an annual report should not duplicate either the structure or the efforts of the Council, but rather build upon the resources and relationships already in place.
A Vision of Housing in Mexico in the Years Ahead
Mexico’s housing markets are currently undergoing a series of transformations. During the course of the past year, while the research for this report was in progress, many of the pieces of Mexico’s housing system have been evolving and changing shape and direction. Many of the challenges and recommendations highlighted in this report are already underway, particularly in the housing finance system, and to a lesser extent in land use planning. Many of the programmatic reforms are clearly rooted in a similar diagnosis of the situation as was reached by the Joint Center for Housing Studies research team. President Fox expressed a bold vision, with the production of 750,000 new homes by 2006. As ambitious as this goal remains, with continued leadership within key agencies, collaborative efforts across public and private sectors to address existing challenges, and the dissemination of information to make processes more transparent and more efficient, it is conceivable that Mexico’s housing system could extend beyond the president’s goal. In addition to 750,000 new homes, a comprehensive vision for the future encompasses many more families provided with decent housing and services, more wealth accumulated and realized through the sale of housing assets, and communities made more livable by improved planning, better infrastructure and state and municipal services.
1Standard market segments are defined by price (in pesos) as follows: Minimum segment is under $80,000; Social segment is $80,000-200,000; Economic is $200,000-380,000; Middle is $380,000-1 million; the Residential segment is $1-2 million; and Residential Plus is over $2 million.
Download the full version of “The State of Mexico’s Housing 2004” in PDF.
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