Lower Housing Subsidies And Recession Caused Mexico's Housing Starts To Drop To A Decade-Low Level

Santiago Cajal, +52-55-5081-4521; santiago.cajal@spglobal.com

Luis Manuel Martinez, +52-55-5081-4462; luis.martinez@spglobal.com

Alexandre P Michel, +52-55-5081-4520; alexandre.michel@spglobal.com

Housing supply is shrinking for the fifth consecutive year, with 157,802 units produced in 2020.

This represents a 12.9% decline from the 2019 level and a 47.7% fall from the 2015 output (see chart 1). Recurring budgetary cuts to the federal housing subsidy program partly explain the contraction of construction of entry-level homes, for which demand exceeds that for other types of housing. The subsidy plummeted to MXN324 million in 2020 for new housing, only about 6% of the 2015 amount. Moreover, the sector took a hit from recession in 2020, given that GDP likely contracted about 8.5%. During the second quarter of 2020, for instance, housing production contracted 24.5% from the same period in 2019, with only a gradual recovery during the third and fourth quarters, but still 12.3% and 13.1% below pre-pandemic levels, respectively.

Industry To Recover At Modest And Uneven Pace, But Risks Remain

Housing starts hit the bottom in 2020. We only expect housing starts to increase at a low-single percentage pace in 2021, most likely to remain slightly below 165,000 units. The country continues to grapple with a housing shortage of about 9.4 million units, while population grew about 1.2% annually in the past five years. According to Mexico's National Institute of Statistics and Geography, half of the country's population was 29 years or younger in 2020. These trends bode well for the homebuilder sector. However, the challenge remains in providing access to housing for the very low-income slice of the population.

Government initiatives may support the affordable housing segment, but budgetary constraints could act as a drag

Government-owned mortgage lenders--Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Infonavit) and Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (Fovissste)--are pushing to expand lending and customer base, although many of these efforts are not necessarily geared towards new home purchases. In particular, Infonavit has increased the size of its mortgage loans and widened the range of product offerings. The institute estimates that it could expand its base by up to 40 million borrowers by providing unemployed workers with a housing account access to its lending programs, enabling two unrelated workers to merge their housing funds, and eliminating the limit of two mortgages per worker. In our view, it's currently uncertain as to what degree these measures can spur demand for new housing because Infonavit and the government's housing strategy have been geared primarily towards home remodeling and do-it-yourself home construction. In addition to these measures, the government budgeted an increment in the housing subsidy program "Vivienda Social" for 2021 to MXN4.1 billion, above last year's amount of MXN1.4 billion. Nevertheless, the budget for the program this year will be less than in 2018 or earlier. Our expectations on the magnitude of the potential impact of these actions on the housing sector are modest given the government's budgetary constraints due to the ongoing recession.

Unlike in previous economic crises, access to mortgages remains wide amid stable interest rates

The housing industry continues to benefit from easy access to Mexico's healthy banking system and state-owned mortgage lenders. For the 12 months ended November 2020, the number of new residential mortgages from both types of lenders totaled about 300,000, down 8% from a year-earlier period. However, mortgage volume for the low-income homebuyers contracted almost 20%, while that for middle- and high-income buyers shrunk only 1%.

State of the economy will influence the industry fundamentals

We believe that downside risks for the Mexican housing sector could persist if soft economic conditions continue. Although we currently estimate that GDP will grow 3.9% in 2021, GDP per capita will likely be near $9,200, below the 2019 level of $9,9000, reflecting a permanent loss of household disposable income, which could ultimately lower housing demand and dim homebuilders' growth prospects, despite relatively low interest rates. As of the end 2020, the Instituto Mexicano de Seguridad Social (IMSS) reported 19.8 million were employed in the formal private-sector, down 3.2% or 650,000 jobs were lost. And according to the Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE), public-sector jobs edged up 0.1% for the same period. If the private sector continues to lose jobs during 2021, demand for new homes could further drop, particularly for the mid- to high-end housing, which fared relatively well during the pandemic.

A drop in the housing inventory could prop up, or increase, prices in some regions.

The number of available homes for sale (low-, mid-, and high-income) has dropped to 65,800 units as of November 2020, a 27% decline from the 2019 level. Inventory in progress was 88,500, down 11%, and the number of new construction projects was 37,000, a 9% drop. The restrictions on construction activity in some states to contain the pandemic may hinder homebuilders' capacity to maintain inventory numbers to meet demand in 2021. Although the decline in housing supply has occurred throughout the country, the northern states have experienced a milder drop in 2020 than the central and southern ones. The housing sector in regions where employment and disposable income have taken a smaller hit from the pandemic would likely post a more resilient performance.

Despite difficult business conditions, our outlook on Mexican rated homebuilders remain broadly stable

Rated Mexican homebuilders continue adjusting their product mix to shifts in demand. We forecast that rated issuers will post mid to high single-digit revenue growth in 2021. In our view, this will be mostly due to an uptick in volume of sales, rather than significant price increases, because we expect the volume of units sold to partly rebound from the sharp contraction in 2020. The economic rebound in 2021, according to our current estimates, won't be sufficient to recover the lost economic output and jobs in 2020. Nonetheless, rated issuers have quickly adapted to a sharp downturn by meeting demand for mid- to high-end housing in more economically dynamic regions, despite a nationwide contraction in housing starts for the past few years. Therefore, we expect rated homebuilders to continue leveraging their business flexibility from strong inventories, landbank reserves, and geographic diversification to raise top-line growth and margins amid at least stable prices and generate economies of scale.

Prudent financial policies have enabled rated homebuilders to bolster credit profiles.

Rated Mexican homebuilders have strengthened their credit profiles through continued years of top-line growth following the housing crisis in Mexico almost 10 years ago through prudent financial policies, wider product mix, and geographic diversification. We expect these companies to maintain similar policies and low leverage. Despite the pandemic-fueled economic crisis, their liquidity remains healthy, with strong cash reserves thanks to an efficient inventory management and a favorable debt maturity profile. Although some entities drew down committed credit lines in 2020, we expect most of them to remain available in 2021, given these companies' well-established relationship with banks and track record of tapping local capital markets.

2021 Mortgage Market Outlook For Financial Institutions

Alfredo E Calvo, +52-55-5081-4436; alfredo.calvo@spglobal.com

Mortgages continue to fuel credit growth, but pace could moderate

Due to Mexico's severe economic crisis in 2020, lending among commercial banks stalled. However, mortgages, which represent 18% of commercial banks' total loans, maintained solid growth momentum in 2020. However, we expect to see a moderating trend in 2021 based on the weak economic recovery.

Chart 5

Infonavit remains the largest mortgage lender in Mexico, because it holds 55% of this market, followed by commercial banks that jointly hold 36% of all mortgages, and Fovissste (9%). We estimate that the aggregate growth of mortgages in 2020--in terms of value--was about 5% (9% for commercial banks). The incentives to boost mortgage demand are still in place, such as the relatively low and stable interest rates for home loans. However, we don't expect growth pace for mortgages to pick up until economic recovery strengthens.

Chart 6

In our view, a depressed economy and weak recovery prospects in 2021-2022 will weaken Mexican banks' asset quality and profitability. However, we believe the effect on banks' performance will be limited. This is because the narrow access to credit in Mexico allows banks to have conservative lending practices with a focus on middle- and high-income customers. Following the pandemic's outbreak, the Mexican banking regulator approved debt moratorium programs that allowed borrowers facing financial hardship to defer loan payments (for up to four months with the possibility of an additional two-month extension). We estimate that loans qualifying for these programs during 2020, represented about 20% of commercial banks' total loans, 5% for Infonavit, and none for Fovissste, given the limited impact on public servants' income during the pandemic.

According to our estimates, 65%-70% of commercial banks' loans under the debt relief program were consumer loans, mortgages, and loans to small to midsize enterprises (SMEs). Moreover, payments on more than 85% of these loans have resumed, while the banks are restructuring the remaining share of these loans for borrowers that are still facing financial difficulties because of the pandemic. Corporate loans make up about 47% of total restructured loans, while mortgages represent about 24%, and the remainder are consumer loans and SME loans.

Non-performing loans (NPLs; past-due loans over 90 days) for commercial banks' mortgages was 3.2% as of Nov. 30, 2020. We expect this metric to rise due to the weak economic conditions. However, conservative loan-to-value ratios (estimated at 60%), along with 93% of mortgages granted to middle- and high-income borrowers, could moderate the asset quality erosion.

Infonavit mostly lends mortgages to low-income borrowers, and to some extent, middle-class borrowers, while Fovissste lends to public servants. Therefore, these entities' asset quality metrics are weaker than those of commercial banks. As of September 2020, Infonavit's nonperforming assets (NPAs; NPLs plus foreclosed assets) were 15.53%, while Fovissste's NPAs were 7.27%. We expect the gap between these metrics for both entities to widen, relative to those of commercial banks, because of the pandemic-related economic crisis and weak recovery prospects for 2021-2022.

Volume Of RMBS Issuances To Remain Modest

Filix Gomez, +52-55-5081-4490; filix.gomez@spglobal.com

During 2020, the volume of rated Mexican RMBS issuances continued to shrink, because 16 transactions from Infonavit, Fovissste, BBVA Bancomer, Patrimonio, and Su Casita were redeemed early. On the other hand, Fovissste and FHipo placed three new RMBS deals totaling MXN16.5 billion.

During the peak of the pandemic, transactions experienced a decline in the collection levels. Collections for RMBS issuances originated by banks and non-bank financial institutions (NBFI), dropped roughly 27% from the pre-pandemic six-month average. Collections for Infonavit and Fovissste's transactions were down about 10%, given that mortgages service is automatically deducted from the employee's payroll.

Nevertheless, we observed in general a stable performance in the transactions we rate. They're fairly seasoned and have adequate credit enhancement levels, with the exception of some RMBS transactions originated by NBFIs. As of October 2020, the average collateralization of Infonavit and Fovissste's rated portfolio was 46.20%, compared with 41.98% for the same date in 2019.

According to the servicers' information as of November 2020, the average default of rated RMBS issuances from NBFIs was 9.9%, 2.1% for those of banks, and 11.5% for Infonavit and Fovissste. Defaults on Infonavit's deals increased at the end of 2019 mainly due to a reclassification of some credits associated with a change in the accounting criteria under which some credits that had some relief programs were considered as defaulted when the reclassification was carried out.

We don't expect a rebound in new RMBS issuance volume for 2021

In our view, Fovissste will account for the bulk of new issuances with one or two transactions for approximately MXN20 billion, in line with its plan, while some private entities could tap the markets during the year. We don't expect banks to return to the market this year, given their access to relatively cheap unsecured funding. Contributions from private-sector employees still represent more than 90% of Infonavit's funding sources, which reduces its appetite for securitization.

For 2021, we expect the performance of the transactions to remain stable with increasing overcollateralization levels on most Infonavit and Fovissste deals and steady NPLs. Based on the current levels of credit enhancement of these transactions, we don't expect a modest increase in defaults to cause downgrades. However, we will continue monitoring the securitized portfolios and could take rating actions in case NPLs surpass our expectations.

Chart 7

Chart 8

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.