Raising the ceiling: New government plans set to improve access to quality housing

A growing population and urban development in key cities across the country has put housing development at the forefront of government policy. But the 2013 housing crisis, which saw the collapse of three of the biggest homebuilders in Mexico, has led the government to change the focus of this policy. A rethink of subsidy allocation, coupled with tax breaks and other incentives, is helping to revive Mexico’s housing sector. Home construction activity is important to reducing the country’s housing deficit, currently estimated at 15.3m homes, of which around 3m need to be rebuilt, and the remaining are in need of maintenance or extension work, according to figures from the Ministry of Agrarian, Territorial and Urban Development (Secretaría de Desarrollo Agrario, Territorial y Urbano, SEDATU). Furthermore, the home-building industry has an important role in the Mexican economy, accounting for 5.9% of GDP and 3m jobs in 2012, according to figures from the National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, INEGI).

Policy Shift

Housing policy throughout the country has traditionally focused on the construction of horizontal single-family dwellings. But the government and some of the country’s biggest home-builders have found that this model is unsustainable for Mexico. After homebuyers started to abandon homes built too far out in the outskirts of Mexico City, the government shifted the subsidies given for homebuilding towards vertical construction in areas closer to the central districts. The result was that three of the country’s low-income home builders – Urbi, Homex and GEO – declared bankruptcy. The homebuilders have been negotiating their accumulated debts with banks, but the issue had a negative effect on the industry, including a significant loss of value of a large part of the newly built homes. Due to the crisis, 2013 saw a 9.7% decrease in the number of houses built in Mexico, which totalled 435,000 in that year, according to figures from SEDATU.

New Boost

Ever since the previous homebuilding model began to show signs of failure, authorities have been trying to revive the sector. At the end of 2014, a new housing policy was established. “The government came up with fresh subsidies to develop new lower-income housing, but in the central parts of Mexico City and other cities across the country,” José Antonio Hernández Balbuena, manager for economy and financing at the Mexican Chamber of the Construction Industry, told OBG. The primary change in strategy has been based on switching the country’s housing policy to focus more on quality rather than quantity. To achieve this, a number of new measures are being implemented by different government institutions involved in the sector.

Doubling the maximum mortgages that workers were allowed to apply for through Mexico’s National Workers’ Housing Fund Institute (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, INFONAVIT) was central; INFONAVIT will now grant mortgages of up to MXN850,000 ($57,205). Moving construction of new homes towards central areas of Mexico City meant an increase in average home prices, which would make it unattainable for low-income earners. Linked to the rise of maximum credit amounts was the denomination of all home loans in pesos, as opposed to multiples of the national minimum wage, which is the credit measurement that was previously used. This change allows both home buyers and INFONAVIT to obtain better credit conditions from financial markets.

Package Deal

New measures were introduced in January 2015 that is expected to encourage investments of up to MXN370bn ($24.9bn) in the housing sector and lead to the construction of some 500,000 homes over the coming years, according to President Enrique Peña Nieto. Tax breaks introduced for home builders working in low-income housing development are also set to make the sector more attractive by allowing homebuilding suppliers of goods and services to recoup 100% of value-added tax (VAT). The measure, intended to avoid transferring the added costs to homebuyers, is expected to prevent a 1% to 3% increase in house prices.

To help maintain the value of newly built housing, the public mortgage institute also made it obligatory for all construction companies working on government-supported housing to contract insurance for any damages that might be caused during the construction process. Besides aiding the relaunch of the real estate sector, authorities also expect the new measures to positively impact municipal tax collection. A new service launched by INFONAVIT will now allow municipal taxes and other home-related government fees to be paid automatically with the loan servicing. Such innovations will help increase tax revenues at the municipal and state levels.

Private Spending

On top of this, the sector will certainly be driven by a healthy level of private spending. The weight of private spending in construction has shifted from 49% in 1993, to 75% in 2014. This is a considerable change in the market attributed to the positive effects that progressive liberalisation of the Mexican economy and rising international participation has had on the sector. Furthermore, it shows a higher level of resilience, which is expected to shield the sector from extensive negative impacts that might arise out of the budgeted decrease in public expenditure.

A full transition to the new policy and funding initiatives and will take time. In October 2014, SEDATU announced that 28% of new subsidised housing in Mexico was still being built outside of new urban perimeters for housing established by the government. This is a step up from 60% in 2012, proving that the current policy is on the right track to both improve the country’s housing segment and tackle the issues associated with urban development.