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Mexico may be on the verge of significant changes in the housing market. The following is a summary of a recent report, published with permission by the Joint Center for Housing Studies of Harvard University. All rights reserved.
In the "The State of Mexico's Housing 2004" Executive Summary, a plan is presented to develop housing inventory more along the lines of what the other North American countries of the USA and Canada follow. Mexico is at a crossroads. There is a great need to restore economic stability and to promote further economic growth within the entire nation. If Mexico has a strong commitment to housing reforms, the national can seize upon a unique opportunity to improve its housing conditions and meet increasing demand. With housing reform, comes economic and social change and development.
There are many challenges ahead.
Currently, housing financing is almost exclusively available only for new construction. Funding is directed to the private sector for high-end homes or the public sector for low-income housing. As a result, the majority of the population must rely on self-financing in order to purchase housing.
"The house of everyone is to him as his castle and fortress, as well for his defense against injury and violence as for his repose." Sir Edward Coke 1552-1634
Statistics show that 50% or more of all new homes are self-built by low-income households. Many of these homes are built on land without clear title and often without basic infrastructure and services. A large share of existing inventory of homes also has questionable legal status and less than adequate infrastructure for utilities.
Because Mexico has experienced strong economic growth in recent years, there has been an increased demand for more infrastructure of services, more need for planning for development, and more demand for funds, or financing.
However, intergovernmental cooperation to finance and coordinate an infrastructure has not been common. There has been little consistency or continuity in local coordination and land use planning. Now the government and private sector want to expand production to take advantage of the increased demand. In the past three years, housing production and investment has increased nearly 45% over previous years. (Comision Nacional de Fomento a la
Vivenda)
As history has shown us, housing for the populations plays an important part in social and economic development of a country.
The five key steps to housing progress, as proposed for Mexico are:
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Extending housing financing to more of the population: i.e. mortgages.
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Put housing production within the legal system. In the past, legal steps have often been sidestepped.
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Improve land and infrastructure of utilities and services.
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Create the ability for homeowners to "trade up" or "trade down" when their personal needs change.
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Collect and use better information on housing and mortgage markets.
Industry and governments leaders recognized that these 5 steps must be taken if the housing needs of the people of Mexico are to be met.
A major key to development of affordable housing is Capital, or Money. Here is where the use of "leverage" comes into play. Historically, many purchases of homes in Mexico have been all cash. This is true for nationals as well as foreigners.
With leverage, comes the ability to have available more capital from additional sources. For leverage, lenders make mortgages and sell the mortgages into a secondary market. The secondary market buys the mortgages (at a discount). The selling of the existing mortgage releases funds to invest into additional mortgages. The process is repeated many times over. If mortgages are the key, then the country has to develop the capacity to manage and measure risk for lending capital. There must be a system for recovering the lent funds, as well as receiving a return on investment.
Until and unless Mexico creates a system of housing development on a firm legal base and until the country corrects the uncertain legal status of existing housing, the wealth held in much of Mexico 's potential housing market cannot be tapped to finance the demand. The untapped potential wealth in future housing has been estimated at over one trillion pesos.
The equity or profit for the seller of a home is what he uses to purchase better housing.
The quality of housing depends on sanitation, water, access to transportation and utilities. Builders need greater assurances in the development process that they can contain their costs and manage their risks. Communities need better planning to prevent illegal land use or substandard infrastructure of utilities, roads, drainage, etc.
Information is vital to improving the housing standards and availability of homes to all residents of Mexico . Information is the basis for improving risk and allowing financial institutions, government agencies, builders, developers, and consumers the ability to make informed decisions.
If Mexico is to expand the amount of credit, housing and mortgage markets, she needs:
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Better information on ownership of land.
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To know the value and legal status of existing inventory, as well as the history of financial performance of her citizens, and financial institutions.
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To know the value of homes bought and sold in the market.
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To ascertain the supply of new homes under construction and the demand for new housing.
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To determine the costs of providing infrastructure and the best methods in land use planning and infrastructure.
All of this information is vital for housing development.
Statistics in 2004 tell us that Mexico's current inventory of homes is about 24 million units, with an estimated value of more than 1.1 trillion pesos or 110 billion USD. Less than 13 % of these homes have any mortgages. The concentration of value in pesos or dollars is between low-income housing and the smaller fraction of higher cost homes. There is no broad base of housing for the 'middle class". The majority of savings of the population, therefore, are in homes and the value of the land. If Mexico is to tap into that savings pool, she must secure access to home equity loans be able to offer mortgages on all housing.
Estimates are that half all-new housing (300,000 dwellings) per year, as well as two-thirds of all existing homes, are without mortgages. The lack of funds to build also creates a substantial number of products that are built with sub-standard amenities and require significant upgrading if they are to be sold for a profit. Housing quality control is scarce and incomplete, even in the more expensive homes.
The private housing sector consists of homes that are self-built, lack clear title and have limited connections to urban services. These homes are built for cash or from informal loans. Information on the number and location of existing units, as well as those that have been upgraded and granted clear title, is incomplete and difficult to find.
The issue of public information available on the resale housing market has contributed to an extremely ill liquid asset and appreciation in home values are seldom realized through capital gains on sale.
The largest demand for housing comes from the four largest cities in Mexico : Mexico City , Monterrey , Guadalajara , and Puebla . Rates of growth are increasing, especially among mid-size cities along the US-Mexico border and coastal tourist areas. Puerto Vallarta should be one of these cities.
The majority of demand for housing which is in the lower social and economic sector, in part because of the large percentage of population at this level. The fastest growing segment for demand of housing, however, is from the middle-income population.
Limited information on local demand and allocation of government lending creates local imbalances between supply and demand. Although there is a clear need for new housing in every market, the geographic distribution of home financing is not available for all areas. The small scale of construction in rural areas makes it uneconomic for developers to meet housing demand in these areas.
Potential demand comes from the number of households interested in buying a home. Effective demand is the number of households with the financial ability to purchase a home by obtaining a loan.
Housing markets operate, the majority of time, in the purchase and sale of new housing, in self-built housing, and to a limited degree, the rental sector. Mobility is limited and what mobility there is may be concealed to avoid taxes or fees or to confirm to agency rules.
Mexico is engaged in a process of reforming its housing system to meet challenges that lay ahead. These reforms may expand and diversify the housing finance market. More sources of capital will come from the ability to increase housing supply. President Fox has a goal of 750,000 new homes to be built each year. If Mexico can create a transformed housing finance system, nearly one million loans a year could be possible.
An important component of the transformation of lending in Mexico is the ability to tap into the equity or profit already present in current housing.
The housing sector in Mexico is undergoing a remarkable transformation. The challenges faced by Mexico and its housing system includes insufficient information to make necessary policy and investment decisions. The recommendation is that a group of industry experts from the public and private sectors create a regular series of forums and publish an annual report on the state of Mexico 's housing.
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. A very important goal of the forums should be to fill the information gap, toe identify and investigate broad topics or interest or concern; to engage in frank discussion of critical issues.
In 2001, President Vincente 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. Board members include leaders in the federal and state housing-related agencies, developers, homebuilders, private mortgage lenders, and educators. The Council meets quarterly with the President or his chief of staff. I additional, 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.
Mexico 's housing markets are currently undergoing a series of transformations. During the past year, many facets of Mexico 's housing system have been evolving and taking shape. The goal and vision for the future is to provide more families decent housing and services, to provide an environment for more accumulation of wealth through the sale of housing assets, to make communities more livable by improved planning, better infrastructure and services.
"Mid pleasures and palaces though we may roam, Be it ever so humble, there's no place like home." John Howard Payne 1791-1852.
Harriet Cochran Murray
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller conduct his own due diligence and review.
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