Mexico's admirable housing market
Last Updated: August 20, 2015
Mexico's real estate market has been buoyed by strong demand in resort communities, according to the International Consortium of Real Estate Associations (ICREA). American and Canadian buyers are returning to Mexico, after a several-year slump, thanks to low oil prices and the strong US dollar, pushing home values up.
American buyers are very important as owners of beachfront properties, which were badly affected by the slump of 2009-10 in areas like Baja California Sur, Nayarit, Baja California, Guerrero and Sinaloa.
However there is also an enormously strong domestic market.
Mexico's most expensive houses are in the municipalities of San Pedro Garza Garcia in Monterrey Metropolitan Area, in Zapopan in Guadalajara Metropolitan Area, and in Acapulco, according to Lamudi’s Q1 2015 report. High-end apartments cluster in Miguel Hidalgo municipality in Mexico City, San Pedro Garza Garcia in Monterrey, and Huixquilucan in Mexico State.
The Mexican market is not driven by speculators. There are many developers, it is highly competitive. Much new housing is built, which keeps prices down. Interest rates are (relatively) low in the social sectors, due to subsidies. Home prices in Mexico rose by 6% annually between 2005 and 2011, slightly above inflation, according to SHF’s home price index. The last big housing crisis occurred after the Tequila crisis of 1994, when a currency devaluation followed by interest rates spiking caused 40% of all bank loans to default. Since then, there has been continuous recovery.
Gross rental yields in Mexico moderately good
Gross rental yields in Mexico are moderately good, though they would appear to have declined during the year 2010.
The Global Property Guide’s house price figures, which in Mexico are based on asking prices primarily for coastal areas, are not really an adequate substitute for good-quality, fully-funded official statistics – but no such statistics exist for Mexico. The Mexican situation is also unusual in that we have concentrated on coastal properties, mostly houses, making it particularly hard to be sure we are getting an accurate picture.
Mexico has high taxes on rental income
Rental Income: Nonresident individuals are generally liable to pay 25% withholding tax on their gross rental income. However, they can elect to have their rental income taxed as business income and through this option; they will be taxed on their net income at progressive rates.
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 30% for 2012.
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.
Slower-than-expected growth in 2015During the second quarter of 2015, Mexico’s GDP decelerated to 2.2% y-o-y growth, lower than the 2.6% y-o-y economic expansion in Q1 2015, according to the Instituto Nacional de Estadística y Geografía (INEGI). The slower growth was caused by weaker agricultural and industrial sectors as compared to the first quarter.
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 2.1% GDP growth.
Mexico’s 2015 economic growth outlook was reduced to a range of 1.7% to 2.5% by the central bank, Banco de Mexico (Banxico). BBVA Research reduced its growth forecast to 2.5% from 3.5%, citing three factors for its lower growth prediction:
- Oil production’s downward trend;
- The level of dynamism in manufacturing exports is lower than expected; and
- Public sector consumption and investment’s contribution to growth were also lower than expected.