Pursuing Lasting Progress in Emerging Markets

On Mexico’s Homes

The news from Mexico’s drug war continues to be grim. However, these horrific headlines obscure the fact that Mexico’s economy has enjoyed a degree of resilience despite the insurgent and criminal activities of the narcotics cartels. Perhaps surprisingly – and in contrast to recent U.S. experience – the local housing market has been a source of strength, benefitting from thoughtful government housing policies that have fostered stability and broadened demand. If Mexico manages to escape its current cycle of violence, the housing market may prove to be an important pillar of future growth.

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The violent drug trafficking-related headlines out of Mexico continue to shock, making one wonder if outgoing President Calderon’s war on drugs is making any headway. Will the outcome of the July 2012 Mexican presidential election result in the continued pursuit of the cartels, or an about-face in policies? The answer to this question eludes me, but Mexico’s efforts to win the war on drugs and overcome this dark chapter in its history may be aided by two current trends worthy of note: one is the re-shoring of manufacturing capacity which I discussed in my October 24th commentary “On Mexico’s Shores,” and the second is the continued robust fundamentals of the Mexican housing market. This commentary will focus on the latter.

With both inflation and interest rates low and incomes rising, Mexico has enjoyed an extended period of economic stability; this in turn has bolstered the fundamentals of the local housing market. Mexico is short on housing and has been for some time. The shortage is estimated at 8.9 million units and is growing by 1 million units per year.1 The housing market in Mexico also benefits from the population’s youthfulness – 40% of the nation is between the ages of 10 and 34. I believe this young and growing middle class will continue to support housing demand for some time to come. Moreover, there is no lack of domestic homebuilders available to meet this growing demand: there are 6 large, well-established, corporate homebuilders and more than 1,050 large independent homebuilders (defined as building over 3,000 homes per year) currently in operation in Mexico.

In addition to robust demand and the ready availability of supply, there are several positive factors unique to the Mexican housing industry which illustrate that adequate housing for the Mexican people is a national priority. In Mexico, private sector employers have the legal obligation to deposit 5% of employees’ salaries into an account at INFONAVIT2, an autonomous institution that provides entry-level mortgages to the Mexican people. This institution was established in 1972, but it was the administration of former President Vicente Fox (2000-2006) who really propelled the institution towards expanding mortgage origination in Mexico in earnest when he installed a mortgage professional to run INFONAVIT, rather than a career politician as had been the longstanding tradition. INFONAVIT has facilitated more than 6 million loans to the Mexican people since its inception and issued USD$6.1 billion of mortgage-backed securities since 2004. INFONAVIT has a stated goal of providing 2.8m new mortgages to Mexicans over the next five years, focusing on the lower income segment of the population and financed by the salary contribution mentioned above (35%), mortgage payments (51%), and market funding (14%).3

There is a parallel savings program for public employees with the same 5% contribution requirement, administered by FOVISSSTE4, a government-controlled agency that provides entry-level mortgages to government workers. These two entities together account for close to 80% of mortgage origination in the country with Mexico’s federal home loan bank and various private banks providing the balance. A third institution worth mention is CONAVI5, a government agency that grants housing subsidies at the low end of the market, both in amount and in interest rate, through its “Ésta es tu casa” (“This is your house”) program. Most mortgage payments in Mexico, whether through the private or public sector, are processed through monthly payroll deductions; this in turn has contributed to a sharp reduction in default rates. Non-performing assets comprise 4.8% and 5.5% of CONAVI’s and INFONAVIT’s balance sheets, respectively, versus over 20% about one decade ago. Furthermore, the three main RMBS (residential mortgage-backed security) issuers in Mexico (INFONAVIT, FOVISSSTE and SHF) were not too dearly affected by either the 2008 or 2011 crises, managing to keep mortgage origination at a stable combined total of roughly USD $2.9 billion per year since 2007.6 All of this detail is by way of illustrating that Mexico is serious about continuing to increase home ownership in the country.

New mortgages originated in Mexico in 2011 averaged between USD$21,000 and 23,0007 in size, with many of the borrowers unable or unwilling to access even basic banking services prior to obtaining their mortgage from the above mentioned institutions. So these mandatory savings programs on behalf of the workers are not only key drivers in increasing home ownership across the country but are also integrating millions of Mexicans into a modern financial system.

It is also worth noting that the Mexican housing market has not experienced an asset price bubble, due in part to prudent loan-to-value practices (70%) and relatively strict mortgage origination standards. The Mexican house price index published quarterly by the Sociedad Hipotecario Federal (SHF) (a Case-Shiller based index), documents housing prices in the country increasing a stable average of 5.42% annually since 2005.8

Mexico Brazil Colombia Chile Argentina USA
Gross Domestic Product (GDP) growth 2010 5.5% 7.5% 4.3% 5.3% 7.5% 2.8%
GDP growth 2011 - estimated 3.8% 3.0% 5.3% 6.3% 8.3% 1.8%
Population (MM) 113.7 203.4 44.7 16.8 41.7 313.2
Unemployment rate 5.3% 6.7% 11.8% 7.1% 7.8% 9.0%
Per capita income (PPP) $13,900 $10,800 $9,800 $15,400 $14,700 $47,200
Government debt / GDP 43.0% 57.0% 31.0% 11.0% 37.0% 108.0%
Stock market capitalization / GDP 47.8% 69.2% 69.5% 167.3% 16.3% 105.8%
2011 Inflation (CPI) - estimated 3.3% 6.6% 3.4% 3.6% 10.4% 3.2%
10 year US $ rate (benchmark sovereign) 3.5% 3.7% 4.1% 2.9% 11.4% 1.9%
Sources: Bloomberg, Brazilian Central Bank, OECD (via the CIA Factbook,

Mexico’s macroeconomic backdrop has been surprisingly benign for more than a decade now, especially when compared to its neighbors. The country has experienced stable growth, low unemployment, low levels of government debt, and it has managed inflation relatively well, as evidenced in the table nearby. The country also enjoys very capable policy management, a burgeoning middle class, stable mortgage markets, strong housing demand, and a wide field of homebuilders to cater to that demand. No one knows whether or when the violence in Mexico might end, but behind the headlines, the housing market gives hope that a stable and steady future for the country lies ahead.

Kate Jaquet

Seafarer had no economic interest in the securities mentioned in this commentary as of the date of its publication. View the Seafarer Overseas Growth and Income Fund’s Top 10 Holdings. Holdings are subject to change.

The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect the writer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.

  1. SHF, Sociedad Hipotecaria Federal, “Outlook for the Mexican Housing Industry”, February 2011
  2. INFONAVIT, Instituto del Fondo Nacional para la Vivienda de los Trabajadores, 2011
  3. INFONAVIT, Instituto del Fondo Nacional para la Vivienda de los Trabajadores, 2011
  4. FOVISSSTE, El Fondo Órgano de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado
  5. CONAVI, Comision Nacional de Vivienda, 2011
  6. CONAVI, “Mexican Housing Outlook 2011”, with data from INFONAVIT, FOVISSSTE, SHF
  7. CONAVI, Comisión Nacional de Vivienda, 2011
  8. SHF, Sociedad Hipotecaria Federal, Mexican housing price index published quarterly on their website