HomeFINANCEInflation in Mexico: how it affects when buying a house

Inflation in Mexico: how it affects when buying a house

Real Estate Technology

The reality is that in our country financial education is insufficient and buyers are often surprised by sudden increases in the prices of goods and services of daily consumption, which is due to the phenomenon of inflation. On the other hand, the increase in the minimum wage is the other essential issue to understand the dynamics of sales prices. In combination, these two factors directly influence the purchasing power of buyers in all sectors, including the real estate market.

Being aware of economic issues is very important, and many times we neglect this aspect. Therefore, this time I am going to allow myself to explain a little more thoroughly how inflation in Mexico and the increase in the minimum wage influence your plans to buy a house or apartment.

What is inflation?

This is defined as the increase in the prices of goods and services in a given period. In simple words: “the higher inflation, the higher the price increase”, and therefore, the value of money is lower. In Mexico, inflation can be viewed through the National Consumer Price Index (INPC), a tool developed by the INEGI that is responsible for recording the behavior of prices on a monthly basis.

This macroeconomic phenomenon depends on factors such as the production capacity of suppliers and the levels of demand for goods and services by consumers.

Inflation in Mexico

Inflation permeates the entire economy, and the real estate market is no exception; on the contrary, it is one of the most important sectors due to its enormous participation in the generation of the national Gross Domestic Product, with a contribution of around 6 percent. every year.

Inflation in Mexico in 2021 was 7.36 percent, the highest figure since 2000, which has been reflected in a rebound in the prices of daily consumption products.

Inflation and real estate

So how does inflation in Mexico affect the real estate market? The answer is very broad, since the real estate sector is divided into many subsectors where this phenomenon affects differently.

In the construction sector, inflation causes the prices of materials to rise, which in turn raises the cost of production and, ultimately, the retail price.

In the leasing sector, inflation causes an increase in rental prices, because if this increase does not occur, the lessor would reduce the value of his income, which could present losses in the medium term.

In the trading sector, inflation affects in several ways. Similar to the case of the lease, the owners increase the sale price of their properties on a par with inflation to avoid losses. For example, if the price of a house is 500,000 pesos and inflation at the end of that year is 5 percent, then the owner will update the price to 525,000 pesos.

Another way in which this phenomenon affects is in housing loans. In addition to determining the increase in the prices of goods and services, based on inflation, the Bank of Mexico determines the monetary policy and establishes its reference interest rate, which in turn serves as the basis for determining the interest rate of new credit programs in the market, including mortgages.

Will the increase in the minimum wage and inflation affect mortgage loans?

This is one of the most frequent and most valid concerns that beneficiaries and applicants for a mortgage loan have, and that is that we all know at least one person who has been paying an Infonavit or Fovissste loan for more than 25 years and complains permanently that he does not lower his debt and that “he sees no end to it.”

This is because in the past, both the increase in the minimum wage and inflation did have a direct impact on mortgage debt, since credit schemes were determined either in Times of Minimum Wages (VSM) or, more recently, in Units of Measurement and Update (UMA). This caused the debt to grow along with these factors, so the debt only continued and became “unpayable”. For example, if only 2,000 minimum wages were already owed and this increased from 1,000 to 1,500 pesos, from one day to the next, 2 million pesos were no longer owed, but 3 million pesos (these numerical examples are for illustrative purposes only). ).

That is why the latest reforms to the laws of housing institutions have focused on correcting this, which was already a very serious problem for borrowers. Currently, it is possible change a VSM credit to pesos and the new schemes are stipulated from the beginning in pesos and most with fixed rates. In this way, before acquiring the financing, the buyer knows exactly how much he will pay during the life of the loan, which allows him to compare more easily and choose the one that best suits his needs.

The risk that looms with inflation above 7 percent is that the Bank of Mexico increases its reference rate, as it has already begun to do, which in turn causes banks to increase the interest rates of their new products. However, this will not affect borrowers who are already paying a mortgage.

How to counteract the negative effects of inflation?

If you have already started with your plans to buy a house in Mexico, you will know that you need to have around 20 to 30 percent of the value of the house available to cover the initial expenses such as a down payment, notary fees and taxes. To do this, you must stick to a savings plan that allows you to raise that money, however, because inflation decreases the value of money over time, the best option is to choose to invest it in low and medium risk instruments, which offer you an annual return equal to or greater than inflation.

For example, so that your savings are not affected by the 7.36 percent inflation of 2021, you must invest your money in instruments that offer you returns above that percentage.

One of the best options that have emerged in recent years in the real estate market is the real estate crowdfundingwhich are schemes that allow you to invest from one thousand pesos to terms from 1 to 5 years, and whose great advantage is that they offer returns of up to 20 percent per year.

Is it convenient to buy a house in this scenario?

It is always a good time to invest in real estate because they are assets that increase in value over the years, unlike cash investment instruments that depend on the fluctuation of the markets, and now more than ever we find ourselves at a critical moment for real estate investments, since the banks have not yet announced an increase in their mortgage interest rates, which could happen in the first six months of the year.

Also, thanks to the increase in the minimum wage, the purchasing power of formal workers is now greater and allows better planning to acquire a home.

Thanks to the combination of these two factors, this is the ideal time to buy a house in Mexico through vivanciosthe real estate portal that offers you thousands of properties throughout the country.

DGeneral Director of the real estate portal Vivanuncios.

Twitter: @BobEsses

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