Mexico’s housing sector is showing signs of more sustainable momentum, underpinned by moderate economic growth, improving labour market conditions, record low borrowing costs and sector-specific reforms. For a 13th consecutive month in April, real residential construction increased y/y and is up 6.4% year to date, significantly outperforming overall GDP growth. The pickup in activity follows roughly two years of declining investment in the wake of the default of several major property developers.

Mortgage credit growth also is accelerating. Outstanding commercial bank mortgage loans, primarily to higher-income households with established credit history, increased 10% year to date through May. According to Conavi (National Housing Commission), new lending by the publicly-owned Infonavit (Institute of the National Housing Fund for Workers), geared to low-income households and accounting for the largest share of Mexico’s mortgage market, jumped 30% over the same period.

The firming in real estate activity has been supported by substantive public sector initiatives aimed at spurring new urban residential development and broadening access to mortgage lending. The Federal government’s National Housing Policy announced in January 2015 targets an investment of 370 billion pesos to the construction of 500,000 homes to tackle a large housing gap affecting over a quarter of households. In addition, the Government has announced an increase in its housing subsidy program, from an initially allotted 8.4 billion pesos to 11.1 billion pesos, mostly aimed to new home financing. Close to 6 billion pesos in subsidies had already been provided to June. Recent mortgage market reforms include increased borrowing limits, extended loan terms, and government guarantees on construction loans. Infonavit is piloting a program to convert some inflation-linked mortgages to fixed-principal loans.

Housing demand also is benefitting from an improvement in labour market conditions. Formal sector employment — a key driver of household credit demand — increased over 4% in the year through June. The improving trend reflects a combination of strengthening labour demand alongside the implementation of a job formalization program which could lead to an increase in the number of creditworthy borrowers. Mexico’s jobless rate, at around 4.5%, is near its lowest level in seven years. Consumer confidence is trending higher, particularly in the major purchasing intentions segment.

Meanwhile, highly accommodative monetary policy settings are bolstering affordability. The Bank of Mexico has maintained its benchmark interest rate at a historic low of just 3.0% since mid-2014. Mortgage rates have edged lower over the past year alongside reduced risk premia and competition among private sector lenders.

The near-term housing outlook faces some headwinds. Mexico’s recent economic performance has slowed, posing an increasing risk to employment and confidence. The economy expanded a moderate 2.5% y/y in Q1, with healthy consumption growth tempered by oil production cuts, public sector restraint and more moderate U.S. industrial activity.

Home prices have yet to show a sustainable upturn. The national average house price (HPI) rose just 1% y/y in Q1, and was down 2% from a year earlier after adjusting for inflation. Price gains for existing homes have outpaced those of new homes since 2013, reflecting proximity to urban centres and better transportation infrastructure, as well as a shift in federal housing policy in favour of urban, high-density housing over new suburban development.

Borrowing costs are expected to drift modestly higher over the coming year, with the Bank of Mexico likely to follow the gradual normalization of U.S. monetary policy. Even so, lending rates should remain at pro-growth levels. Borrowers have some options to maintain low carrying costs in a rising interest rate environment, including lengthening of loan maturities. Some higher-income borrowers could benefit from switching from government agency loans to commercial banks that may offer lower rates.

"We expect the Mexican economy to gain more traction through 2016, supporting job creation, household spending and credit demand. While the U.S. rebound has been slow to materialize, more recent data are pointing to strengthening consumer demand, evidenced by the upturn in auto and home sales. An improving U.S. outlook should bolster Mexican exports, reinforced by a more competitive currency and labour costs," noted Scotiabank Economics report.

Importantly, Mexico’s medium-term growth prospects are being bolstered by structural adjustments underway in key sectors — including energy, telecommunications, education, labour and finance. Increased public infrastructure spending also should contribute to improving productivity and investment, reinforcing ongoing strength in key industries such as motor vehicles and aerospace. Demographic trends — including a growing, youthful workforce — also are favourable for housing demand over the medium term. According to the UN’s latest population estimates, the median age of Mexico’s population is around 28 compared with 38 in the United States and 41 in Canada. Rapid urbanization in recent decades has lifted the urban share of Mexico’s overall population to almost 80%, approaching Canadian and U.S. levels.

Source: Scotiabank Economics