The complicated situation of the Housing sector

The generation that was born in the 1980s and in the first half of the 90s, commonly known as Millennials, remembers that economic crises have been circling around during part of their lives. For example, the drop in oil prices, the increase in foreign debt and the devaluation of the peso against the dollar.

The “Millennials” Survey, conducted by Deloitte in 2020, revealed that the surveyed young people, between 25 and 30 years of age, reported having lost their jobs or having taken involuntary unpaid leave; it got so far that, at the beginning of May, one in five was unemployed at a global level.

This generation has been forced to be cautious with their money, as they possess far less capital than previous generations did at the same age. Carlos Jiménez Bandala, a specialist in organizational studies at the Autónoma Metropolitana de México, states that Millennials are a generation that lives precariously, in debt and without the systemic capacity that previous generations had to build their patrimony.

According to the Resuelve tu deuda [Solve your debt] company, this generation lives in the red and without reserves to face an emergency: 63 % of them do not have saving funds and 68% of them are in debt and it is therefore expected that they will be over-indebted by the end of the pandemic.

In consequence, the dream of buying a house seems to be a distant one Just in Mexico City, the Dada Room portal pointed out that during 2020 and up until the middle of 2021, one out of every five young people returned to the home of their parents or to that of other relatives.

Dada Room pointed out that during 2020 and up until the middle of 2021, one out of every five young people returned to the home of their parents or to that of other relatives

In 2021, Vivanuncios stated that 70 % of the country’s Millennials considered themselves unable to afford a home, 40% answered that they did not have savings of any kind, 23% said that they had less than 20 thousand pesos to their name, while 50% said that their income is not sufficient for making  any type of investment.

In the peripheral areas, the value of the land usually represents between 6 and 18 % of the total cost of a housing project, while in consolidated areas the rate is of up to 50 %. Bandala warns that only 1% of young people consider themselves to be eligible for a mortgage credit in relation to their income. “Today, people live in crowded conditions under the concept of cohousing and, if some do buy, they do so in the outskirts of the city, which represents a three-hour commute to get to work.”

In this sense, Sara Topelson, director of the Housing Research and Documentation Center (CIDOC), says that between 2000 and 2018, the policies on housing considered the construction of a large number of houses (750 thousand per year), even though limits had to be set in terms of location, size, typology and connectivity, which became a problem; “If you take people to live far away, it turns out that that cannot afford it, nobody explained the cost of transportation to them. When the monthly payment for transportation and mortgage is higher than 35% of the salary, it stops being feasible, which has forced working people to move a little closer to their workplaces, but under worse conditions.”

According to the National Survey of Occupation and Employment (ENOEN), New Edition, in February of 2022, the Economically Active Population (EAP) aged 15 and over was of 58.2 million people, which implied a participation rate of 58.7 %. This population is 3 million higher than the one of February 2021. Additionally, according to the 2020 Census, the average age in the country is of 29 years and, therefore, the demographic bonus will continue to favor the demand for housing in all of its segments for several years.

Gonzalo Méndez, president of the National Chamber of the Housing Development and Promotion Industry (National CANADEVI), acknowledges that 650,000 homes are built every year. However, “it is important to remember that even though our activity is an essential one, sales depend on there being employed people, preferably in stable employment; that is, with resources to acquire a home; The problem is that there also is a housing deficit of 9.2 million”, he points out.

The specialist recalls that, in 2007, close to 90 thousand homes were sold per quarter, in average, while in 2021 approximately 10 thousand 500 units were placed each month. This means that the market has shrunk 65% over the last 14 years. At the same time, he mentions that, between 2011 and 2015, the housing inventory started to decrease in the country and there is currently a supply of less than 100 thousand units; The potential market, however, is of 400 thousand homes per year.

Having a stable job: there lies the dilemma

Up until November of 2021, 962 thousand permanent jobs had been created in Mexico as a result of the reform on subcontracting. Óscar de la Vega, a labor law lawyer, claims that this reform will provide legal certainty and will guarantee the workers’ right to social security, in addition to ensuring profit sharing, the benefits required by law, the acknowledgment of seniority at the job and, above all, the opportunity of having social security dues paid to the IMSS [Mexican Social Security Institute] in line with their actual salary.

According to the IMSS, with the regularization of people working in Outsourcing companies, employees received a salary increase of between 5 and 12% compared to their prior salaries. Just as an example, a worker that had a base salary used for the payment of social security dues of 475 pesos under the third-party hiring scheme, will now have a base salary of between 498 and 532 pesos.

This increase was due mainly to the fact that employers regularized the situation that their workers found themselves in and they stopped practices such as the sub-valuation of income, that is, when they register their workers at the IMSS with a lower income than the one that they actually receive, a method through which over 3 billion pesos in employer contributions were evaded each year, according to calculations made by the National Worker’s Housing Fund Institute [Infonavit].

“The Infonavit established special criteria to allow them to maintain the score they had prior to the migration between companies”, explains Angélica González, IMSS-Infonavit coordinator at the Tecnológico de Monterrey. For this reason, several companies adjusted their employees into their payrolls, and they registered them with an Employer Registration Number (NRP), in order to comply with the tax obligations of the reform.

The association of the NRP is the merger of several NRPs within the same company into an “associating NRP”, with the objective of acknowledging the employment continuity of the workers, in such a way that if an employee is changed to another location within the same work center, his pre-qualification is not affected and he can be eligible for credit, in accordance with the Infonavit definition. However, under the special criteria, workers may keep their score to be eligible for a housing credit or for non-mortgage credits. “as long as the NRP to which they were ascribed is associated with the business group that they work for”, the coordinator explains.

In February 2022, 178 thousand 867 jobs were generated before the Institute; for this reason, the secretary of labor, Luisa María Alcalde, states: “we are very close to 21 million formal jobs, with an average salary of 14 thousand 3.9 pesos.” The catch is that there has been a deficit of 845 thousand 293 jobs since the start of the crisis caused by the pandemic. Even with the reform, it is estimated that close to 8 million workers are under the scheme of subcontracting; this represents a loss of 50 billion pesos in Social Security.

Although the foregoing is positive, it is absolutely insufficient, warns Jorge Sales Boyoli, also an expert in labor law, “because there is a huge lag in the generation of formal jobs in the country; because the salaries with which the new workers are being registered are low, approximately twice the minimum wage, despite the averages being misleading and salaries being claimed to be higher.”

How long do you have to work to obtain a real estate loan from an organization such as the Infonavit? After the score system for having access to a mortgage loan was modified to a minimum of 1 thousand and 80 points in May of 2021 (based on factors such as the worker’s salary registered with the IMSS, age, accumulated balance, housing subaccount and the number of bimesters that the company paid dues to the Institute), the necessary score can be reached in a time ranging from 9 months to 5 years and the credit varies from 6 thousand to 3.9 million pesos.

Up until January of 2022, workers paying dues to the Infonavit with a monthly income of 3 thousand 500 pesos could have access to a credit of 179 thousand 813. However, in Mexico City, as of December 2021, the price of a unit was of 38 thousand 323 pesos per square meter according to the index published by Inmuebles 24.

A 41 square meter property had a cost of 1 million 571 thousand 243 pesos. Therefore, if  persons entitled to social security benefits  living in the capital city wanted housing with these characteristics, they would have to earn around 50 thousand pesos per month in order to have access to a credit of 1 million 623 thousand 771 pesos with the agency. It is worth noting that, up until the last bimester of 2021, only 8.45 % of the Mexican people (8 out of every 100 workers) earned a salary that was higher than three minimum wages (around 12 thousand 690 pesos per month), according to the ENOEN.

Up until last year, the minimum wage was of 141.7 pesos per workday; it increased to 172.87 pesos on January 1st of 2022.

Sales Boyoli notes that “Mexico has to create at least 100 thousand formal jobs every month in order to meet the demand for the number of jobs needed for the people joining the labor market and we did not create even a million jobs from January to December of last year. We barely generated 846 thousand 416 job sources, when we should have created 1 million 200 thousand jobs.”

Boyoli adds that “it is positive that this upward trend in the creation of jobs continues, but we need to take into account that we started this year with a deficit of almost 300 thousand jobs. On top of this, the IMSS only reflects a small part of the complex puzzle of the labor market, it only represents 40% of the EAP; that is, the remaining 60% is not affiliated to social security.” In other words, people entitled to social security benefits only cover 4 % of the labor force in Mexico. This generates a dynamic that excludes people with limited incomes, those working in the informal sector, those who have access to housing through leasing and those who build homes in a family lot.

The National Housing Survey (ENVI) 2020 conducted by the Inegi [National Institute of Statistics and Geography], the Infonavit and the Federal Mortgage Society (SHF), warn that 56% of the EAP prefers to apply for informal loans; 37.8 % seek to use their Infonavit credit and 12.2% will obtain credit through a private financial institution.

The 2020 ENVI also indicates that of the total housing units in Mexico (35.3 million), 67.8 % are lived in by their owner  (23.9 million). 57.3 % of this total were self-produced [built by their owners]; 35.5 % were already built when they were bought, and 7.2 % were acquired in another way (inherited, a gift, or the information is unknown).

Dynamics of the housing construction market

In the report “Perspectives of the Housing Sector in Mexico 2022”, prepared by Expo CIHAC, the Executive Vice President of the Housing Commission of the Mexican Chamber of the Construction Industry (National CMIC), Juan Francisco Bermúdez Rojas, points out that housing alternatives must be generated in the country for the bulk of workers that represent the highest percentage and who need to acquire a home, this group corresponds to 74% of Mexicans with salaries of less than five UMAS [Units of Measure and Update] ($ 481.1 pesos). Among the possible solutions, the self-production of said housing is contemplated; however, this implies training and technical assistance.

In this sense, the consulting firm Softec predicts that for this year the placement of housing will be of around 182 thousand 462 units. This element, he specifies, would be directly related to the drop in supply and the fact that the inventory is insufficient to meet the demand. It is worth noting that an investment of around 480 billion pesos would be expected for the real estate sector as a whole. Of this total, 55 % would be focused on the sector of housing, that is, an allotment of around 265 billion pesos.

Marisol Becerra, a director at Tinsa México, points out that some regions pose significant challenges for the construction of social housing, because, while the demand for them exists, there are also complications, such as the increase in the price of construction supplies; this complicates the generation of supply of this type of construction for which there is a high potential demand.

“It is still very complicated to provide for these segments in cities such as the capital of the country because the costs of land added to the increase in the price of construction materials limit the viability of real estate projects focused on this segment of the population, which is precisely the one in which the greatest deficit and the greatest unmet demand are present”,  she acknowledges.

Mortgage portability increased in 2021, representing the transfer of mortgages from one bank to another in order to improve financial conditions given the low interest rate levels, which already represents over 11 % of mortgage placement, clarifies Enrique Margain Pitman, mortgage credit coordinator of the Mexican banking association.

Housing credits represent 22.6% of the current portfolio in commercial banks, and at the end of February 2022 they reached a significant growth of 10.6%, reports Carlos Gómez, an analyst at Intercam Banco. In any case, reference interest rates of close to 8.0% are projected, which will make financing considerably more expensive compared to 2021.

On this topic, Gonzalo Méndez, president of the Canadevi, says that 2022 looks like a promising year. In general terms, the industry is expecting a growth of at least 3 % in housing placement. In this tenor, he recalls that the closing figures expected for 2021 indicate that the industry will close the year with the placement of 228 thousand 500 new homes. Therefore, the goal to be reached in 2022 is of 235 thousand units.

A recent report from the Federal Mortgage Society (SHF) shows that. by 2022, there will be a total demand of 839 thousand 491 housing credits, 63 % of which correspond to improvements and 37 % to acquisitions. The demand estimated by this organization indicates that the main participant in housing loans for 2022 will be the Infonavit  (46.8 %), followed by commercial banking (33 %), other organizations (17.3 %) and the Fovissste [Housing Fund of the Institute of Security and Social Services of the Governmental Workers] (2.9 %). The federal entities with the most dynamic acquisition rates will be Nuevo León, Jalisco and the State of Mexico.

Continuing forward

In 2022, the real estate sector of the country could generate an investment of  480 thousand 817 million pesos, slightly lower in comparison to the 492 thousand 641 million pesos invested in 2021, but this will depend on the progress of the economic recovery; in the best of cases, there is hope that this amount could increase.

In general, specialists agree that after the impact of Coronavirus, the Housing, Vacation Homes and Industrial segments have been the most dynamic ones, while the ones that are making a slower progress, with slim prospects for growth are offices and commercial spaces. Thus, the real estate sector still faces a complex scenario and not all segments and zones are recovering at the same rate.

For Gene Towle, director at Softec, a sector that has surprised us in recent months is that of Vacation Homes, which has a value of more than 100 thousand dollars and is located in tourist destinations such as Cancún, Riviera Nayarit, Vallarta, Tijuana, Los Cabos, Mazatlán, San Miguel de Allende or Acapulco. He predicts the placement of 12 thousand units, which could generate an investment of over 64 billion pesos.

The regions with the greatest potential for luxury housing are found in large cities, beach locations and those with the greatest safety and industrial growth opportunities, such as the ones located in the North and Center of the country.

What is required is the continued creation of mechanisms to meet the growing demand and there is still a long way to go, including:

• Finding financial mechanisms to attend to the needs of unaffiliated workers who seek to buy new housing valued at less than 700 thousand pesos
• Promoting the mixed income scheme, designed in collaboration with the banks, making use of the housing subaccount balance, with the objective of providing services to a population that is not being attended to, to this date
• Transforming the traditional Fovissste credit system, which is structured randomly, to a system based on scores, such as the one used by the Infonavit, which will make home purchasing among state workers more agile.
• The inequality of opportunities is not resolved only through the will of individuals. If we want to improve the processes of social improvements and income redistribution, collective efforts are more efficient than leaving the solution in the invisible hands of the market.

*Article prepared based on the report on the Perspectives of the Housing Sector in Mexico 2022, Expo CIHAC