Current Housing

Situation in

Mexico

2008

Housing Situation in Mexico 2008

CIDOCFundación Centro de Investigación y Documentación de la Casa A.C.

CONAVIComisión Nacional de Vivienda

FOVISSSTEFondo de la Vivienda del ISSSTE

HICHabitat International Coalition, A.C.

InfonavitInstituto del Fondo Nacional de la Vivienda para los Trabajadores

SedesolSecretaría de Desarrollo Social

SHFSociedad Hipotecaria Federal, S.N.G.

UNAMUniversidad Nacional Autónoma de México

Prepared by Fundación CIDOC and SHF with support from CONAVI and SEDESOL, and participation from INFONAVIT, HIC, UNAM, FUNDACIÓN ICA and other institutions related to the housing sector.

(C) All rights reserved. Information from this publication may be used as long as the source is cited.

INDEXPresentation

Acknowledgements

Executive Summary

Section 1: INTERNATIONAL ENVIRONMENT 1.1 Housing and urban development policies in the world 1.1.1 Spatial planning Strategies in the European Union (EU) 1.1.2 Government actions to aid low income housing 1.1.2.a Ashford, south of North Downs, United Kingdom 1.1.2.b Cambrils, Tarragona province, in the Autonomous region of

Catalonia 1.2 Best practices in housing in Latin America 1.2.1 Complementary subsidies the solidary funds of housing in Chile 1.2.2 Practices in Social Production of Habitat 1.2.2.a First Sustainable Cooperative Neighborhood in Paraguay 1.2.2.b Salvadoran Foundation of Development and Minimum

Housing 1.2.2 c Social and Progressive Production of Habitat in Veracruz 1.3 Key Findings

Section 2: CURRENT HOUSING MARKET SITUATION 2.1 Economic Situation 2.1.1 Economic Indicators 2.1.2 US mortgage lending crisis, effects of the policy applied by the

US federal government and its impact on the profits of Banks and on Mortgage Backed Securities

Effects of the Mortgage lending crisis in the US and Mexico 2.1.3 Purchasing power for higher value dwellings due to the cost

reduction in the mortgage market 2.2 Social Production of Habitat (SPH) 2.3 Estimates of housing needs and demand 2.3.1 Housing Needs 2006-2012 2.3.2 2007-2013 estimate of the effective demand based on households’

income and geographic location 2.3.3 Housing needs of persons in a situation of poverty: Articles 61 and

62 of the Housing Law 2.4 Population served and not served by the financial sectors 2.5 Rental housing market 2.5.1 Legal framework 2.5.1.1 Fundamental regulation 2.5.1.2 Procedural Regulation 2.5.2 Fiscal framework for the landlord 2.5.2.1. Federal taxes 2.5.2.2. State or municipal taxes 2.5.2.3. Tax Burden 2.5.3 Market structure 2.5.3.1. Real estate companies 2.5.3.2. Tenants

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2.5.4 Comparison of investing in buying or renting 2.5.5 Reform proposals 2.6 Housing built by developers trading on the Mexican Stock Exchange 2.7 Real value of dwellings in Mexico, 1990 – March 2008 2.8 Housing quality insurance 2.9 Quality of life indices 2.9.a Residential and financial satisfaction index 2.9.b Infonavit Housing Quality Index 2.9.c Users’ opinion: survey in the Mexico City Metropolitan Area

(MCMA) 2004-2007 2.10 Follow-up of international obligations regarding housing rights 2.11 Key Findings

Section 3: SUSTAINABLE URBAN AND HOUSING DEVELOPMENT 3.1 National Program for Urban Development and Spatial planning 2007-2012

(PNDUR-OT) 3.2 National Housing Program 2007-2012: towards a sustainable housing

development (PNV in Spanish) 3.3 Normativity, powers and the urban planning system in Mexico 3.3.1 Current situation 3.3.2 Diagnosis and outlook 3.4 Land and territory 2000-2005 3.5 Integrated Sustainable Urban Developments (DUIS in Spanish): main

features and advances 3.6 Spatial planning and disaster prevention 3.7 Key Findings

Section 4: LAND, LAND BANKS, AND INFRASTRUCTURE 4.1 Outlook for land supply in the main cities of the country 4.1.1 Intraurban and peripheral land 4.1.2 Security in land tenure and current situation of the processes to

regularize land tenure Program to Aid Settlers in a Situation of Patrimonial Poverty to

Regularize Irregular Human Settlments (PASPRAH) 4.1.3 Land for population in a situation of poverty 4.1.3.1 Generation of urban land for progressive complexes 4.1.3.2 Municipal participation in land management 4.2 Cost-benefits of the formal and informal land markets 4.3 Recycling and redensification 4.4 Federal guidelines for developments, Art. 73 of the Housing Law 4.5 Infrastructure for housing and urban development 4.5.1 Urban transportation and mobility: national issues 4.5.2 Urban Solid Waste (USW) 4.5.3 Water 4.5.4 Electricity 4.6 Key Findings

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Section 5: MORTGAGE FINANCE 5.1 Programs in the housing sector 5.1.1 Advance in the subsidy 2007 program Program of Financing schemes and Federal Subsidies for Housing

“Esta es tu Casa” 5.1.2 Progress of the mortgage insurance market 5.1.3 Rent to Own (RTO) 5.1.4 Savings mechanisms to enable access to housing for unserved

sectors. Savings program 5.1.5 Urban development bonds. Instruments to create spaces for the city 5.2 Microfinance in Mexico. What stage is the market in? 5.2.1 Financing for the Low-income Sector 5.2.2 Mortgage financing in the Low-Income Sector 5.3 Strategies that promote the sector’s efficiency 5.3.1.a Progress on the Modernization of the Public Registers of

Property (PRP) 5.3.1.b The predial tax in mortgage financing. Analysis of

municipal revenues 5.3.1.c National Information and Housing Indicators System

(SNIIV) 5.3.1.d Activities of the Mexican Mortgage Association 5.4 How to interpret the Total Annual Cost (TAC) operated and traditional offers 5.5 Key Findings

Section 6: DEVELOPMENT OF THE SECONDARY MORTGAGE LENDING MARKET

6.1 Current issues on the market and their features 6.1.1 Mortgage Backed Securities (BORHIS in Spanish) 6.1.2 Securities Program (CEDEVIS in Spanish) 6.2 HITO (Hipotecaria Total) 6.3 Covered Bonds 6.4 Other financing sources 6.4.1 Bridge loans 6.5 Key Findings

Section 7: CONCLUSIONS

7.1 Achievements 7.2 Challenges

Appendixes APPENDIX A. List of Graphs APPENDIX B. List of figures, tables, maps, and diagrams APPENDIX C. Acronyms and abbreviations APPENDIX D. Bibliographic references Websites

Methodology appendix

Appendix 1. Real value of dwellings in Mexico, 1990-2008Appendix 2. TAC report: June 2008

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PresentationNowadays, half of the world’s population lives in cities. According to current projections, by 2030, close to 40 percent will be in need of housing and suitable land, with infrastructure and basic services.

In Mexico, this trend will be seen mainly in the population ranging from 20 to 59 years old, thus transforming the population pyramid, as well as economic and social needs. Housing demand will be three times as high as demographic growth, and nearly 80% is expected to be found in metropolitan areas, where over 75% of the population is expected to live by the year 2030.

Housing is one of the most important sectors in the Mexican economy, representing around 2.4% of the Gross Domestic Product (GDP); last year alone, it generated one million 300 thousand jobs at various levels.

In view of this scenario, the Current Housing Situation in Mexico-2008 study is another tool of information and reference for the sectors involved in housing development. Since the first publication in 2004, this diagnosis has become a transcendental reference tool for the analysis, reflection, and reference that guide the sector’s planning in our country.

The main challenge in this field at present is the creation of instruments that will make it possible to align the current housing policies with the financing and subsidy plans, as well as the access to suitable land to serve the needs of the population as a whole in a focalized manner, allowing the continuity of the established actions and programs.

In Mexico, over one hundred state and municipal regulations affect 75% of the constructions, and only 7% of the municipalities in the country have updated zoning regulations for land use. Another challenge is the policy of land for housing at the various levels of government, which implies the need for suitable regulatory instruments for each urban reality, in order to create compact and sustainable territories. Encouraging these patterns of occupation will help reduce risks, prevent settlements in unsuitable areas, and optimize the services and infrastructure of urban areas.

Thanks to the committed participation of the interinstitutional group made up of the National Housing Institutions, the Secretaría de Desarrollo Social, la National Housing Commission, Mexico’s National Autonomous University (UNAM in Spanish) and Habitat International Coalition, Fundacion CIDOC has integrated the thematic diversity and indicators that have a bearing on housing. We should note that the information used is the result of the preliminary 2007 close, as well as a cut up to April, and also up to the second quarter of 2008. More recent information is available on the websites of each of the institutions.

In its fifth edition, the Current Housing Situation in Mexico-2008 presents the advances and short- and long-term challenges, and incites the various sectors and players related to housing to brainstorm ideas and proposals that will favor housing quality and inhabitability.

Arq. Sara Topelson de GrinbergUndersecretary of Urban and Territorial Development at Sedesol

Acknowledgements 2008This publication was made possible by the participation of the following institutions and individuals who contributed with their experience, knowledge and time to the development of this analysis of the Housing Situation in Mexico. Without their support and participation, this project would not have been possible.

CEMENTOS APASCOEduardo KretschmerGustavo Gastelum

CEMEX MÉXICOSalomón Karakowsky

CONSORCIO ARAGermán Ahumada RussekGermán Ahumada Alduncin

CORPORACIÓN GEOLuis Orvañanos

GRUPO BRACSAElkan Sorsby

GRUPO CAMECarlos GosselinJuan Ramón Ramírez

GRUPO DEMETBernardo RiojasEnrique Costemalle

HIPOTECARIA SU CASITAJosé Manuel Agudo

GRUPO ICALuis ZárateDiego Quintana

GRUPO ICONSAAlberto FrancoSantiago Aldasoro

ALTTA HOMESJuan Carlos Díaz Arelle

GRUPO SADASIEnrique VainerIsaac VainerLuis de Pablo Serna

GRUPO SAREDionisio SánchezArturo Sánchez

SOCIEDAD HIPOTECARIA FEDERALJavier Gavito MoharMaría Paloma Silva de AnzorenaAntonio Puig EscuderoGerardo Bazán MoranteFrancisco Gallegos Tovar

CONAVICarlos Gutiérrez RuízMiguel Hernández ContrerasMarco Antonio Quiróz LópezRafael Pírez San SebastiánVíctor Manuel Santillán Meneses

InfonavitVíctor M. Borrás SetiénAriel Cano CuevasErnesto Gómez-GallardoNadiezhda de la Uz BlancoJorge Juárez Guerrero

FOVISSSTEManuel Pérez CárdenasNoemí Stolarski Rosental

HABITAT INTERNATIONAL COALITIONEnrique Ortiz Flores

JOINT CENTER FOR HOUSING STUDIES DE LA UNIVERSIDAD DE HARVARDNick RetsinasEric Belsky

SedesolRino Torres BañosCraig Davis ArzacEnrique BetancourtSilvia Mejía RezaEdgar Ramirez Rodríguez

UNIVERSIDAD NACIONALAUTÓNOMA DE MÉXICOEsther MayaJorge Cervantes

FUNDACIÓN ICASergio Macuil

FUNDACIÓN CIDOCMónica Rivas Bazán

Executive SummaryIn recent years, housing production has increased by over 40 percent, becoming one of the most important economic activities in the Mexican economic and urbanization process. The participation of both the public and private sectors has been key to the current housing supply; however, there still remain great challenges that must be solved, such as providing more access to mortgage lending for the lower-income population and, on the other hand, linking these efforts to a boost of the development of sustainable housing. This study discusses topics relevant to the matter, with a view to bring about ideas, policies, and actions that will benefit Mexican households.

In its fifth edition, the Current Housing Situation in Mexico is divided into seven sections. The first one offers an outlook of the international scene through experiments in housing and spatial planning, together with their effect on the policies in favor of the least served sectors. Three of these examples, found in the United Kingdom and Spain, are included; these countries have financing schemes for the population that has no access to the formal market, via the integration of subsidies. In Latin America, the Fondo Solidario de Vivienda in Chile subsidizes a good location through incentives for the construction of housing on suitable plots.

Likewise, this section describes three cases that contribute, through different approaches, to the practices of Social Production of Habitat (SPH), to the building of an active and responsible citizenry, and to the strengthening of the social fabric, enabling the creation of quality of life and greater opportunities for economic development. The case of Paraguay is an example of organized population which, via a cooperative, succeeded in improving its quality of life through optimal dwellings, infrastructure, and services; in El Salvador, the government aided in the development of 43 thousand dwellings; and in Mexico, the experiment shows the results of the five thousand benefited parties in a community of women. The acknowledgement of SPH in our country was reiterated in the 2006 Housing Law, and later, in 2007, its consolidation began in the federal government’s subsidy program.

The second section analyzes aspects of the current housing market and discusses the main economic indicators that make it possible to put into context the progress achieved in the construction industry. It also looks at the effect of the mortgage lending crisis in the US and Mexico, and its impact on Mexicans’ purchasing power to buy a home. It should be noted that, by June 2008, activity in the construction industry had increased by 8%. The current potential demand for housing in the country is presented using estimates from SHF. The analysis includes households whose income ranges from 0 to 3 General Minimum Wages (GMW), as they represent 34.1% and are the segment of the population that is underserved by the National Housing Institutions (ONAVIS in Spanish) and financial intermediaries. It establishes the need to bolster microfinance and SPH as alternatives to serve the sectors that have no access to the formal market in all the spheres. The creation of the Committee for Social Production of Habitat within CONAVI’s National Housing Council is notedecent.

According to CONAVI data, in the 2006-2012 period, housing needs nationwide amount to over 4 million 427 thousand new dwellings and over 2 million 930 thousand home improvements, indicating a change in the trends of future needs.

Three quality of life indices are presented. The first one refers to the study of Residential and Financial Satisfaction, created by SHF based on the experience of the borrowers of the various financial institutions with regard to their dwellings, the housing complex, and the city; the second is Infonavit’s Housing Quality Index, created through the valuation of the new dwellings purchased by its borrowers; and finally, the UNAM’s, which reflects the conditions of dwellings in the Mexico City Metropolitan Area.

The chapter ends with an analysis of the right to housing, which is not limited to massive construction, but in addition implies a collection of obligations: security of tenure, access to infrastructure and services, affordability and accessibility, among others.

Section three looks at the topics of sustainable urban and housing development considered in Sedesol’s National Program for Urban Development and Spatial planning 2007-2012. The general strategies of this program, as well as their specific lines of actions, are presented, including the implementation mechanisms destined to promote local and state initiatives aimed towards the urban and regional development of the country. In addition, the creation of an Evaluation Indicators System is proposed, to monitor and rate the progress of urban policies.

The housing policy can be seen in CONAVI’s National Housing Program 2007-2012, through five transversal and multisectoral axes that establish coordination and complementarity mechanisms. Both instruments include the strategic goals and platforms of the National Development Plan (NDP) 2007-2012, and propose the implementation of programs and strategies that make up the national policy on the matter.

The housing sector’s concern with reorienting city growth led to the creation of the workgroup to Promote and Develop Integrated Sustainable Urban Developments (DUIS) including the participation of Sedesol, Semarnat, SENER, CONAVI, BANOBRAS, Infonavit, and SHF. Its goal is to channel the growth of the large housing developments towards sustainable and integrated urban schemes.

The goal is to achieve new patterns and paradigms of land occupation promoting compact, inclusive cities, based on the proper management of natural resources—land, water, and energy. We should recall that 79% of the urban areas in our country are exposed to floods, and 35% of the total population inhabits them.

The fourth section describes the situation of the land, the land banks for housing, and the infrastructure. The estimates of land needs for the population that earns under three Minimum Wages (MW) are between 45 thousand and a little over 82 thousand hectares in the 2007-2012 period. The effects of this demand are seen in the analysis of the National Urban System (SUN in Spanish), which reports growth of 17 thousand 500 hectares per year. At times, this growth takes place in unsuitable locations, or places that are far from workplaces and services. Thus, Sedesol has developed the National Urban Expansion, Recycling, and Densification Program, with incentives for orderly and sustainable growth in the national territory. Likewise, it is creating the federal guidelines for developments, established in Art. 73 of the Housing Law, which are expected to begin operating at the end of 2008.

The issue of recycling and redensification assumes that there is enough land on the urban outskirts to house the expected population, without deteriorating the environment, and without having to yield more farmlands to cities. As for infrastructure, it is clear that the country’s cities and metropolitan areas are deficient in the hierarchical organization of their road infrastructure, and many of them lack sanitary landfills. Between 35 and 40% of the primary energy is consumed in high-rise buildings; the housing sector is one of the main ones in the emission of Greenhouse Gases (GHG), the mitigation of which poses a significant challenge for this sector. The analysis presented in this study establishes the importance of creating sustainable urban dwellings, with medium to high-medium densities; efficient public transportation; mass corridors that will discourage the use of automobiles; adequate solid waste management; water recycling; and incorporating energy savings designs into dwellings.

Section five reviews the progress and impact of the mortgage finance programs offered by the ONAVIS. In 2007, the “Esta es tu casa” Program exercised 60% of the subsidies destined to the acquisition of new housing and 29% to home improvement. By August 10, 2008, this program’s resources had run out, as 196 thousand 307 subsidies had been placed—46% more than was estimated. With regard to SHF’s Microfinance Program, by the end of 2007, 29 thousand 396 microloans had been placed, when the goal was for 100 thousand up to the end of 2008.

SHF offers its Rent to Own (RTO) and Savings Programs as alternatives of housing finance to persons with medium to low incomes who have no proof of income, no fixed salary, have problems with their credit history, or saving up the down payment. The role of Savings Accounts and Microfinance companies in lending financial services, together with its impact on the lower-income segment population, is analyzed and includes the possible interrelationship of SHF with said institutions to offer financing solutions.

The Modernization of the Public Registers of Property program shows that, at the end of 2007, a total of 58 studies were performed, including 37 baselines. Following this topic is the description of the features of the “Program for the Collection of Property Tax through Financial Institutions”, which makes it possible to meet the demands of states and municipalities and increase property tax collections.

The progress made by the National System of Housing Information and Indicators (SNIIV in Spanish) foresees considering the creation and incorporation of the “Satellite Housing Account”. The establishment of the Mexican Mortgage Association (AHM in Spanish), aimed at bolstering the national mortgage market and promoting regulatory, legal, and structural changes, that will ensure the development and sustainable growth of the sector, is reported. Moreover, a section is included devoted to implementing the Total Annual Cost (TAC) for mortgage loans.

Section six discusses topics of the secondary market; it presents the results of years of work by SHF, Infonavit, and financial intermediaries to promote alternate financing schemes in order to achieve greater accessibility to mortgage lending.

The mortgage securitization model or mortgage backed securities (BORHIS in Spanish) issuance has proven to be an efficient and successful mechanism to supply the housing market with resources. By the end of 2007, nearly $26 billion pesos had been issued in BORHIS. By July 28, 2008, nearly $7.292 billion pesos had been issued, and the year is expected to close with 30 billion pesos. Thus, Mexico is the largest Residential Mortgage Backed Securities market in Latin America, with over 60 issues since 2003.

Infonavit’s Securities program (CEDEVIS in Spanish) shows that a little over 24 billion CEDEVIS have been placed since 2004 and up to April 2008, providing the Institute with liquidity.

Last, the conclusions are found in section seven, wherein the achievements in 2007 and some cases up to April and the first half of 2008 are highlighted. Likewise, the challenges for each of the various topics related to housing and its urban context are also discussed.

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Section 1

INTERNATIONAL ENVIRONMENT

1.1 Housing and urban development policies in the world

1.1.1 Spatial planning Strategies in the European Union (EU)

The concern of balanced and sustainable urban development in terms of land has been the basis of a reflection in the international context, and particularly, in the European one. It establishes the need to integrate spatial planning with environmental sectoral policies. This double perspective is visible in various plans and strategies on a national level.

The EU’s spatial -environmental cohesion policy

It began in 1999 with the launch of the European Spatial Strategy (ESS), created by the member States and the European Commission, where the goals of the spatial policy are established. It is worth noting the launch of the European Spatial Agenda in 2004, in the meeting of the Ministers for Spatial Planning held in Rotterdam, whose goals were to look in depth at the concept of spatial cohesion ad achieve greater coherence of the community policies with a spatial impact. For the coordination of actions, they have the Subcommittee on Urban Development (SUD), as an organization for cooperation and information exchange between the 25 member States of the Commission.

The European Commission developed the ESPON 2002-2007 (European Spatial Planning Observation Network)1 program. This transnational

cooperation program at the heart of community initiative Interreg IIIB, in which all 25 member States and other associated countries (Norway and Switzerland) participate, is coordinated by Luxemburg via an intergovernmental agreement between the participating states, and 50% financed by the European Union. The goal is to act as scientific and technical backup for the ESS, as can be seen in the decision-making process. Its contents are organized into three axes: a) thematic studies of aspects of particular interest to European spatial planning (urban-rural relationship); b) analysis of the effects of these community policies; and c) the establishment of methodologies, databases, and indicators of spatial planning.

The Spatial Strategy

It proposes three fundamental guidelines centered on the urban system, that can be applied to any geographic reality and to sectoral policies:

Encourage the development of a more •balanced polycentric urban system2, with a new relationship between urban and rural areas. Have integrated transport and •communication strategies that will allow citizens to access the territories.

1. www.espon.lu2. The term polycentric has a broad sense as a new pattern of the relationships between cities and territories, as opposed to the trend of concentration. It

originates in the decentralized tradition of some central European cities, and despite its appeal, is not yet sufficiently developed. European Spatial Planning establishes the model of spatial concentration/dispersion applicable at various levels: European (interregional), territorial (intraregional), and of urban agglomeration (intra-urban).

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Stimulate the creative, innovative, and •intelligent development of the protection of nature and the cultural heritage.

These guidelines reflect the main trends of imbalance seen throughout the European territory, summarized in a strong duality due to the growing concentration of activities and riches in given areas, and the abandonment or loss of functions in others, particularly the weaker regions.

From a spatial point of view, cities gain in importance and greater prominence; therefore, a favorable urban environment must be created, combining within the group of cities the physical, social, and productive structures. Thus, the greatest challenge for the European Union is the design of sustainable urban policies that will involve the citizenry in the urban and spatial regeneration.

1.1.2 Government actions to aid low-income housing

1.1.2.a Ashford, south of North Downs, United Kingdom3

In the city of Ashford, the main activity is agricultural commerce. This is part of the expansion plan for the southeast of England, in the Thames Gateway (the Thames Gateway Development Framework)4, which in the English planning system is a sub-regional spatial strategy. Around 4 thousand 597 hectares with decadent industries and other uses were identified in this area, which it was proposed to regenerate changing the land use. This is one of the areas with the highest growth, with access to new jobs and a low crime rate, thus acknowledged as a good place for living.

The guidelines state that all developments must have a percentage of housing for the low-income population (affordable housing), which means housing worth 70% of its price on the market. This condition remains in perpetuity should the dwelling be put up for sale again. The percentage of affordable housing that developments must have varies from 20 to 50%. The developer must provide recycling facilities in sites with 500 or more dwellings.

The Ashford Municipal Council is working with various Housing Associations to meet the needs of the population that has no access to the market, with the following programs:

Rental housing. This includes both the •properties owned by the Council and

the Housing Associations, as well as the supply of new dwellings. The allocation plan allows applicants to choose their best option from the available properties, based on their needs.Shared Ownership – Homebuy. Most •applicants are first-time buyers; there are different plans to acquire these dwellings, one of them being Rent to Own. The program functions under four formats:

Open Market Homebuy. The 1. government offers a credit for the down payment on a dwelling in the private market, chosen by the beneficiary. The government subsidizes 25% of this loan, and the borrower pays the remaining 75%, free of interest. New Build Homebuy. New housing is 2. offered under a plan that is generally 50% buy and 50% rent. New Build discounted rent. New 3. housing is offered for rent at around 80% of the market value.Homes for 100% sale. Dwellings for 4. sale at affordable prices for first-time buyers.

Low Cost Home Ownership. Beneficiaries •acquire the property at 70% of the market value; the other 30% remains the property of the developer.

3. www.ashford.gov.uk, www.homebuy.co.uk4. www.communities.gov.uk

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These programs mainly benefit workers in the public sector who perform activities deemed essential to the community’s wellbeing (Key Workers), i.e. meaning police officers, doctors, teachers, firefighters, and city government employees.

1.1.2 b Cambrils, Tarragona province, in the autonomous region of Catalonia5

This analysis focuses on the Municipality where the tourist city is located—an important part of whose economy is supported by farming and fishing. Its fishing port is one of the greatest tourist attractions in the region.

The government’s actions are based on the Zoning Law, which states that in Municipalities with over 10 thousand inhabitants and in Capitales de Comarca, the Town Councils must reserve 20% of the housing in the new planteamientos for protected housing, plus 10% at least for the new concept of vivienda de precio concertado. Urban planning is enabled to include the new system of public dwellings, which makes it possible to build official protected and rental housing on plots destined to equipping, to meet temporary requirements of groups in need of assistance (senior citizens) or emancipation (youth), as per the previously established social policies. Moreover, the Town Councils participate actively, yielding plots for the Catalan Land Institute (INCASOL) to build “protected housing”.

INCASOL enables citizens who have trouble accessing the supply on the free market to obtain a dwelling. It obtains land for building social housing, and simultaneously expands the supply of residential land for private or self-developers; it provides the municipalities with land for new equipping and free spaces to solve the needs of the central or expansion areas of the city; and it promotes the urban renovation to generate land for social housing. These new residential sectors favor the continuity of the existing urban fabric. It also acts in the urban nuclei of municipalities with a deteriorated physical environment, demolishing rundown housing to obtain suitable land for

building where INCASOL or public and private developers can build new dwellings that will meld with the surroundings.

It also promotes industrial land and land for services to bolster the concentration of economic activity and prevent the dispersion of sectors that lead to the occupation of free land in distant areas and with accessibility problems.

The Catalonian Land Institute promotes and executes housing via three actions:

Official protected housing for sale. On land •of the new residential sectors or on land freely transferred or exchanged by the Town Council. It is developed according to the existing Housing Plan, with a useful surface of 70 or 60 m2.Official protected housing for rent. For •inhabitants in general, and for rent to persons in particular situations (young or senior citizens). It has surfaces of 40 or 50 m2, and can be built on land destined to equipping. Neighborhood remodeling. Buildings that •have structural damage and are located in neighborhoods in a process of urban deterioration are demolished to build “public promotion housing”, which are assigned to the same residents, offering them financing facilities for acquisition, based on their income levels.

5. www.infocambrils.com

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1.2 Best practices in housing in Latin America

1.2.1 Complementary subsidies the Solidary Fund Housing in Chile

Background: the complementary subsidies are applied Solidary Fundo f Housing I and II, which enable the securing of a subsidy from the State that, together with families’ savings, makes it possible to build or buy a new or used social dwelling. The complementary subsidies are for location and equipping.

The beneficiaries of these subsidies are the families who don’t have the resources to purchase a dwelling. Goals: To reward good location, enabling financing for well-located plots, to either build or buy a dwelling. A subsidy that gives families the chance to choose the dwelling they will buy or build, and the neighborhood where it will be. There is also a subsidy for equipping where the additional resources are used to finance works of equipping and improvement of the urban environment.

Program structure and operation: In order to obtain this subsidy, some of the requirements are: collective housing projects with a maximum of 150 dwellings, which must be located in cities with over 5 thousand inhabitants, within the urban limits, and in an area that has basic infrastructure services. They must have direct access to a thoroughfare, public transportation, schools (pre-basic and basic education), and healthcare centers. In the case of collective projects, at least 60% of the applicants must be inhabitants of the municipality where the plot is located.

The sum of the subsidy is established based on the fiscal valuation of the property (be it a dwelling or plot), with a ceiling rate per dwelling, which varies in the case of construction. We must note that there is a restriction: the dwelling built cannot be sold for 15 years, from the moment it is registered.6

Size of the participating and benefited •population: cities with over 5 thousand inhabitants or more, according to the 2002 population census.

The subsidy for location is an incentive •to generate housing that is closer to the city, to these families’ workplaces.

Methodology: the Chilean Housing Institute gives housing subsidies as a direct aid that the State provides to those families who cannot finance their first dwelling on their own; this subsidy is complemented with the family income, and in some cases, with mortgage loans and/or third party contributions. There are also subsidies for the improvement of social housing, the environment, and neighborhoods.

Project originator: Chilean Housing •Institute.Starting date: November 9, 2007.•Stages of the process: the way the fiscal •valuation correction factor is calculated to determine the differentiated subsidy for the location of projects for built and existing housing acquisition was modified.

Achievements: The subsidy for location is an incentive for comprehensive and orderly urban development, as it encourages the production of housing on intraurban land, preventing the speculation and purchase of land in areas distant from the metropolises, in favor of:

Neighborhood improvement•Improvement of the urban image: •patrimonial or environmental rescue Improvement of public spaces and of •the urban coexistence

6. www.minvu.cl

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1.2.2 Practices in Social Production of Habitat (SPH)

Despite the multiple limitations they face due to a lack of specific financial, legal, administrative, fiscal, and promotion instruments, which keep them from developing more efficiently and with greater coverage, the three experiments presented below show the huge potential of the social production of habitat to serve the lower-income population. They also exemplify its capacity to influence, not only public policy, but also the creation of an active and responsible citizenry, the strengthening of the social fabric, the low-cost improvement of participants’ quality of life, and the

opening of opportunities to bolster their economic situation. In the more complex cases, implying the organized management of progressive development complexes, we find the appearance of a supportive, ludic, and socially responsible culture, as well as the integration of environmental and gender equality topics into their daily practice.

All three cases are examples, from different perspectives, of the concept of social production included in the Housing Law under Article 4.

1.2.2.a First Sustainable Cooperative Community in Paraguay7

Location: Paraguay

Background: the creation of groups began in 1999, and in 2000, the cooperatives were established to move to an intense training stage, prior to embarking on the development of a pilot construction program for a cooperative neighborhood, with the aid of the Committee of Churches for Emergency Aid (CIPAE), driven by five housing cooperatives for mutual aid joined in a Cooperative Consortium, as the manager of the neighborhood and a Coordinating Board8.

The Uruguayan Federation of Housing Cooperatives for Mutual Aid (FUCVAM in spanish) offers counseling and guidance from the start, securing for the project the cooperation of the Swedish Cooperative Centre (SCC).

The established housing cooperatives are: “Sembrador” de Luque; “Ñande Róga” de San Lorenzo; “Óga Apo” de J. Augusto Saldivar; “Óga Aty” de Villa Elisa; and “Óga Porá” de Mariano Roque Alonso, with a total of 300 families.

Goal: To fully improve families’ quality of life in a sustainable and supportive manner, with full self-management within the framework of the cooperative, considering the dwelling, the infrastructure, employment, and production as means, rather than ends.

Strategy: the cooperatives adopted the mutual aid system from Uruguay, whose immediate purpose is decent housing for each of the members, in a neighborhood with all the services, in order to improve the quality of life of all the families in it.

Through organized work, this low-income sector has improved its income, thus relieving their permanent needs.

Thanks to the pressure created by this new project in Paraguay, the Senate passed the Housing Cooperatives Act in 2003, which enables state financing for the construction of housing using this system, with public funds.

The sustainable cooperative neighborhood is based on a housing cooperative for mutual aid with broad participation and supportive practices. The features that define a neighborhood as sustainable are:

Continuous process of improving the •support awareness and technical capacity of its members.Good self-management capacity.•The development of all sorts of production •and service enterprises based on the population of the neighborhood itself. Other enterprises, such as Community •Radio, sewing, and handcraft groups.

7. See full record at www.hic-al.org8. FUCVAM (2008), www.fucvam.org

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Creation of cultural, theater, music, and •dance groups.Coordination with other neighborhoods •and social organizations.Good technical advice. •

Achievements and lessons learned: 300 dwellings built, construction of production and service units: smithy, carpentry, prefabricated concrete, bakery, orchard, transportation, sewing workshop, permanent training space for computing, and a community radio broadcaster.

More opportunities (work and study) for •the members, thanks to the process of increasing awareness, education, and permanent training. The member is backed by a supportive •entity with a legal status, such as the Cooperative, not only to pay the dues, but also to support or bolster their own

initiative, as well as those that can be developed as a community. The model generates decent employment •opportunities for the members, within or without the neighborhood (production and service companies).The coordination with other •neighborhoods and organizations, as well as good technical advice, lend greater support to the cooperative neighborhood. The supportive practice, related to the •greater number of opportunities, makes it possible for the member to have a better chance at keeping their dwelling. Over 10% of the inhabitants of a •cooperative neighborhood can find a job within the neighborhood, through sustainable production and the lending of services9.

1.2.2.b Salvadoran Foundation of Development and Minimum Housing10

Location: Delgado City, El Salvador

Background: the Salvadoran Foundation of Development and Minimum Housing is a non-governmental non-profit organization, devoted to the creation of a social awareness that will promote the development and necessary social transformations to benefit the poorer sectors of the Salvadoran population. It began operating in September 1968, as a result of a natural disaster that razed the dwellings of a group of settlers in the suburbs of the east of El Salvador.

Goals: Comprehensive promotion of the person, the family, and the community, of the more needy sectors of the population, to generate a critical awareness, providing the social tools for their organization, participation, and political influence in the processes of their own development, but also, with political proposals in agreement with the people’s expectations and needs.

Boost the settlers’ constructive skills and abilities, so they can improve and transform their vulnerable environments into spaces that are suitable for social and community development.

Restore, together with the beneficiaries, impoverished neighborhoods, creating more inhabitable spaces.

Structure and functioning of the programs: the institutional programs represent a level of national planning: Strategic Planning, Institutional Programs, and Projects. They are participative mechanisms which guarantee the continuity of the institution’s strategic lines through the creation of multidisciplinary teams in each of the defined programs.

Methodology: the working model is based on the fact that it is possible to significantly contribute to the elimination of poverty and marginality, as well as the modification of some of the structural

9. Sources: - CIPAE. First Sustainable Cooperative Community in Paraguay, review no. 9, Paraguay, 2007.- Aguilar. The experience of the sustainable cooperative community Kuarahy Resë. lecture National Encounter for the Social Production and Management of Housing, CONAVI, HIC-AL, UIA, Mexico City, Mexico, 2007.10. See full record at www.hic-al.org

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causes of this situation, through a comprehensive housing and complementary service program. There are two principles behind the Foundation’s actions:

Organization of the settlers, which •gives them a sense of belonging to their corresponding community, and due to which they gain an experience of responsibility to deal with its problems.Through the self-management process, •the community acquires the criteria and elements for decision-making in face of its problems and for the development of social awareness, which enables greater participation in the necessary change processes nationwide.

Main programs:

1. Technical/Constructive programsNew Urban Settlements•Neighborhood Improvement•Rural Settlements•Historical City Center•Housing Cooperatives for Mutual Aid•Construction of Education Infrastructure•

2. Socioeducational ProgramTraining•Organization-Interrelation•Legal and administrative support of tenure•

3. Economic Development ProgramMaterials research, training, and •production centerTenure and Machinery Service•

4. Research and Planning ProgramResearch•Dissemination•

Actions performed up to 2007:

Number of projects completed: 260•Number of dwellings built: 42,868•Number of dwellings improved/rebuilt: •1,231Number of families benefited: 42,868•Number of individuals benefited: 253,333•Total coverage: 14 departments in El •Salvador and the department of Yoro, in Honduras11

1.2.2 c Social and Progressive production of Habitat in Veracruz12

Location: Veracruz, Mexico.

Background: The project arose in 1997 from the need to create alternatives for the construction of housing in the Xalapa land reserve, in face of the threat of rescission of contracts by the State Government. After a participative diagnosis, the decision was made to carry out a housing construction pilot scheme with seven families, headed by women, the main axes of which were participation and savings from the low-income.

This enterprise raised great expectations among the members of the organization; thus, so far, over 1 thousand 500 housing actions—

mostly improvement—have been performed in 10 municipalities of the state of Veracruz, where women’s participation has been key, as they represent 85% of all the members of the projects.

Goals: Encourage the construction and/or progressive improvement of housing in the low-income neighborhoods of Veracruz.

Consolidate the community organization, •savings capacity, and solidarity, particularly among women, for the construction and/or improvement of their dwellings.

11. Sources: - FUNDASAL. Memorias Laborales, 2004, IMPRESOMATIC, S.A. DE C.V. El Salvador, 2005.- FUNDASAL (2008)www.fundasal.org.sv12. See full record at www.hic-al.org

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Generate the economic sustainability •of the process of social production of habitat.Influence the public policies related to the •social production of affordable habitat.

Program structure and functioning:

The project is divided into three parts

Community organization. This is the •essential part of the project, through which the supportive groups are generated in each neighborhood to operate and evaluate the project in all its stages: technical, financial, and administrative. This work requires the population’s participation to enable a process of identity and solidarity that will allow the execution of the project.Financial operation. The contributions to •execute the works have three sources: the member women, the Revolving Fund, and the Federal Government. Technical advice and supervision. The •Project’s Technical Team is responsible for and coordinates this stage; just as in the previous stages, it requires the participation of the beneficiaries, in this case, for the design, production, and execution of the work.

Players involved and their role:

UCISV-Pobladores A.C. Social •organization whose mission is to “Promote sociocultural, economic, and political transformation processes, with a focus on gender, among the population of Veracruz, to influence in the creation of social players that are capable of generating alternative construction enterprises for a fair, democratic, and sustainable habitat.”National Housing Commission (CONAVI). •Public institution, decentralized from the federal public administration. It channels subsidies for home improvement.Universidad Autónoma de Veracruz •(Veracruz autonomous university), Architecture and Anthropology faculties. Interns performing a Social Service. Municipal Government. Granting building •permits.

Centro de la Vivienda y Estudios Urbanos •(CENVI) (center for housing and urban studies). NGO responsible for the systematization of the project.

Components of the program or project:

The Project is part of the Neighborhood and Home Improvement Program and is considered an instrument that boosts social organization, and reintroduces the comprehensive vision of habitat, not only as the physical space that men and women inhabit, but also as a space for interaction with society and nature. Thus, it values the integration of these elements:

Physical. Land acquisition, construction, a. and home improvement, social management of infrastructure, basic services, and equipping. Importance of defending the green areas, which are under constant pressure to be divided into plots. Importance of spatiality for the program’s execution. Social and Cultural. Strengthening the b. community organization and development of training and education processes for self-management. Assessment and prioritization of women’s role, and promotion of positive actions that will enable their participation: adequate schedules, punctuality, safety in the meeting places, allowing children, among others.Ecological. Encouragement of a new c. mindset, particularly for the good use and saving of water, reflected in the promotion of plumbing techniques (dry toilets and root networks). The housing design considers inhabitability and health factors (ventilated spaces, suitable space distribution, kitchen areas), as well as spaces to produce ornamental and/or medicinal plants and garden produce for family use. Productive. Peculiar element in two d. senses: because housing production in itself creates direct and indirect jobs; and due to the construction of potentially productive spaces within the dwellings: workshops, stores, bakeries, etc. It should be noted that the organization encourages the creation of family enterprises which allow for another source of income.

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Achievements and main lessons learned:

Women’s permanent participation and •strengthening of their self-esteem. Sensitization of the Project’s member •families regarding the importance of the social production of habitat, the progressive construction of housing, and the technical advice to achieve suitable housing designs. 5 thousand members benefited directly.•1,500 housing actions executed: 20% •new construction, 35% expansion, and 45% improvement.Establishment of Revolving Fund (RF).•Resources used: $ 13’904,508•

-RF contribution ($11’903,708) 86% -member contributions ($2’000,800)14%

RF recovery: 85%•

The local development of the settlements •has been boosted through investments in the community.Sole organization with female leadership •carrying out the social and progressive production of housing, following its own model and with its own resources.Acknowledged by CONAVI as a subsidy •distribution entity.International acknowledgments:•

UN-Dubai 1998 Award as one of 0the 10 best practices in habitat improvement.Finalist in the 2003-4 World Habitat 0Awards of the Building and Social Housing Foundation13.

1.3 Key Findings

In Europe, economic, environmental, and •urban development policies seeking an ecological and sustainable balance in spatial planning have been established.

The EU’s European Spatial Planning 0Observatory Network was created as a tool to support urban policies, in search of a settlement model for spatial concentration/dispersion metropolises.

In the United Kingdom, Spain, and •Mexico, financing schemes, via subsidies, have been developed for the population that has no access to the market.

In the United Kingdom, all 0developments must have a percentage of housing for the lower-income population.In Spain, the protected housing 0program on land transferred or exchanged by the authorities is being developed.In Mexico, the subsidy program has 0been in operation since the 80’s; beginning in 2007, new rules for granting the subsidies were defined.

The fondo solidario de vivienda in Chile •has encouraged the construction of housing in well-located plots through subsidies for location.

During over four decades, the Social •Production of Habitat (SPH) has served the demand from the population that has no access to the formal housing market in Latin America.

In Mexico, SPH was consolidated 0through the 2006 Housing Law, and then in 2007, through the federal government’s subsidy program.Since a decade ago, over 1 thousand 0500 housing actions in low-income neighborhoods have been carried out in Veracruz (Mexico), wherein women’s participation was key in the community organization. This organization was acknowledged in 2007 by CONAVI as a subsidy distribution entity.In Paraguay, the population improved 0its quality of life through dwellings with infrastructure and services, using the concept of cooperatives. These

13. Sources: internal documents from UCISV-POBLADORES AC, April, 2008.

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experiments made it possible for the cooperatives to gain access to public funds, by law, as of 2003.In Delgado City, El Salvador, the 0Salvadoran Foundation for Development

and Housing, together with the settlers, has built over 43 thousand dwellings, through the government’s comprehensive housing program.

27

Section 2CURRENT SITUATION OF THE HOUSING MARKET

2.1 Economic Situation

2.1.1 Economic Indicators

As of June 2007, economic activity, measured by the Global Economic Activity Indicator (IGAE in Spanish), has grown at a slower pace. Based on the

information presented by the National Statistics Institute (INEGI in Spanish) in May 2008, this indicator grew an annual 1.0% (see Graph 1).

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Graph 1. Global Economic Activity Indicator (Observed and seasonally adjusted series)

Source: Created by SHF with INEGI data.

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seasonally adjusted series

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By economic sectors, services, which represent around 63.5% of the Gross Domestic Product (GDP), grew a mild 0.17% on a monthly basis, due to the positive performance of telecommunications, real estate and rental activities, financial, personal, and business support services. The industrial sector14, which generated 30.6% of GDP in the first quarter of 2008, advanced 0.07% up to April, due to greater production of transportation equipment, machinery, mineral-based products, building and construction of civil engineering or major works, and energy generation, transmission, and supply. On the other hand, the farming sector, whose accrued value is 3.4% of GDP, reported a monthly advance of 1.90% up to April as a result of a greater harvested surface.

Thus, by May, economic activity as a whole was 0.34% greater than in the previous month.

With regard to annual inflation gauged through the National Consumer Price Index (INPC in Spanish), it settled at 5.3% in June 2008, 1.5 percentage points above the figure

for December of the previous year (3.8%). This increase was due to the rise in the international prices of various commodities and energy, as well as of some farming products, and the end of the discount program on the prices of some products in self-service stores. On the other hand, the core15 and non-core components advanced 0.9 and 3.2 percentage points in June 2008, to settle at 5.0% and 5.9%, respectively. This behavior in core inflation was due to the upward trend in food prices, whereas the evolution of non-core inflation was mainly affected by the hike in the prices of managed goods and services (own housing, packaged tourist services, airfares, diners, and restaurants).

The national producer price index (INPP in Spanish) showed a rising trend in the second half of 2007 and first months of 2008, as a result of the acceleration of annual variations mainly in the construction, basic metals, and transportation and communication industries, resulting in a year-over-year (YOY) change of 4.9% in June (see Graph 2).

Graph 2. National Producer Price Index Excluding Oil and Finished Services(Annual percentage variation)

Source: Created by SHF with Banco de Mexico data.

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CIn order to mitigate inflation expectations, Banco de Mexico (the Mexican central bank) decided to raise the overnight rate by 25 basis points to 8.0% on July 18 2008 (see Graph 3).

The growing spread between Mexico’s interest rate and the US Federal Reserve’s Target Rate resulted

in a sustained appreciation of the exchange rate in the last few months of 2007 and up to July 2008, when it reached 10.06 pesos per dollar—a level that hadn’t been seen since May 2005 (see Graph 3).

In addition to inflationary pressures, the Mexican economy’s country risk settled at 173 basis points by July 24, 2008, after having

reached its all-time high of 72 basis points on June 1, 2007 (see Graph 4).

J F M A M J J A S O N D J F M A M J J A S O N D J F M A

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Graph 3. Overnight Rate, US Target Rate, and Exachange Rate in Mexico

Source: Created by SHF with Banco de Mexico data.

Graph 4. Country Risk of the Mexican Economy (EMBI+)

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Graph 3. Overnight Rate, US Target Rate, and Exachange Rate in Mexico

Source: Created by SHF with Banco de Mexico data.

Graph 4. Country Risk of the Mexican Economy (EMBI+)

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BUILDING 55.0%

TRANSPORTATION 18.9%

OIL AND PETROCHEMICALS 9.6%

WATER, IRRIGATION,AND SANITATION 4.3%

ELECTRICITY AND COMMUNICATIONS 4.9%

OTHERS 7.3%

Graph 6. Construction Industry:Distribution of the value of production

Source: Created by SHF with INEGI data up to April, 2008.

With regard to direct infrastructure investment, the approved Federal Budget for 2008 amounts to roughly $175.99 billion pesos, representing 9.4% of the country’s total budget.

In 2008, according to Banco de Mexico, the economy is expected to show moderate growth of 2.4% to 2.9% in real terms, given the inflationary

pressures on international food markets, and the US recession.

Current situation of the construction industry

According to INEGI data, the construction sector generated close to 6.8% of GDP in the first quarter of 2008—0.2 percentage points below its share during the same period a year earlier (see Graph 5).

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Graph 5. Share of the construction sector in GDPBy type of works: 2003-2008

Source: Created by SHF with INEGI data.

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Within the sector, 55.0% represents building16; 18.9% is transportation17, and 9.6% is oil and petrochemicals18; the remainder is represented by water, irrigation, and sanitation, electricity and communications, and others19 (see Graph 6).

16. Construction of housing, schools, buildings for industry, commerce, and services, hospitals and clinics, and buildings for recreation and leisure.17. Construction of highways, roads, streets, railways, subway and suburban trains, and urbanization and highway works, among others.18 Drilling, extraction plants, refining, petrochemicals, storage and distribution, and pipe conduction systems.19.Setup of signaling and protection, soil movement, underground excavations, assembly and installation of metal and concrete structures, special foundation laying, hydraulic and sanitary, gas, electromechanical, and air conditioning installations.

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The impact of the construction sector on the national economy is clear when considering that its sales to other sectors of the economy and its and purchases from them are equivalent to 4.95% and 0.94% of GDP, respectively. Purchases within the sector represent only 0.72% of GDP20.

In June 2008, activity in the construction industry was at a similar level as in June 2007, with an annual increase of 8%. On the other hand, growth has shown a moderate pace since 2007 (see Graph 7).

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Graph 7. Industrial Activity Indicator: Construction ( Observed and seasonally adjusted series)

Source: Created by SHF with INEGI data.

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Likewise, the number of workers employed in the construction sector and registered in the Mexican Social Security Institute (IMSS in Spanish) rose 10.34% YOY in June 2008. On the other hand, the average daily wage in real terms decreased by (-)0.84% in the same period, whereas in 2006 it grew 3.31%. (see Graph 8).

Graph 8. Construction Industry: Number of permanent wage earners Registered in the IMSS and Averange Real Daily Wage

Source: Created by SHF with information of the Comisión de Salarios Mínimos.

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Inflationary pressures •observed in the last months have favored a slowdown in the economy, as well as the appreciation of the exchange rate. Likewise, the country risk has risen.Since 2006, the construction •industry has shown moderate growth, as has its number of workers; however, so far in 2008, the corresponding real salary has decreased slightly.

20.INEGI. National Accounts System, last update of the input-product matrix (2003). Data up to March 2008 (current prices).

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Graph 9. Home Prices in the US (S&P/Case- Shiller Home Price Index)

Graph 10. Home Prices in Mexico (Constant pesos Jan. 2008)

Source: Created by SHF with data from Standard Poor’s and Softec.

Source: Created by SHF with data from Standard Poor’s and Softec.

series adjusted seasonally by extreme values

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2.1.2 US mortgage lending crisis; effects of the policy applied by the US federal government and its impact on Banks’ profits and on Mortgage Backed Securities21

The housing market has been significantly affected worldwide by the mortgage crisis in the US. In order to understand its origin, it is necessary to analyze some key facts:

US financial entities began to a. grant subprime mortgages to individuals with low-quality credit records, charging higher interest rates (at a variable and fixed-variable rate) to compensate for the increased risk, while at the same time the origination criteria for credit-granting were relaxed.The possibility to take out a b. second mortgage, even surpassing borrowers’ payment capacity, and the considerable hikes in home prices in the last few years caused a speculative bubble, which translated into higher risk for lenders. This was due to the fact that the price of the dwelling backing the mortgages didn’t reflect the dwelling’s real value22 (see Graphs 9 and 10).

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Graph 9. Home Prices in the US (S&P/Case- Shiller Home Price Index)

Graph 10. Home Prices in Mexico (Constant pesos Jan. 2008)

Source: Created by SHF with data from Standard Poor’s and Softec.

Source: Created by SHF with data from Standard Poor’s and Softec.

series adjusted seasonally by extreme values

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21.Figures and data taken from L. Kohn, Donald – Vice Chairman; “Testimony – Condition of the U.S. banking system, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate”, from March 4, 2008. Board of Governors of the Federal Reserve Systemwww.federalreserve.gov/newsevents/testimony/kohn20080304a.htm22. With information from Standard & Poor’s and Softec. Home prices in the US rose 106.5% between January 2000 and May 2006, compared to 20.9% from January 1985 to December 1999.In Mexico, home prices rose 39.6% in the same period, and are still 8% below the levels seen in 1994.

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Subprime lenders securitized mortgage c. portfolios of credits granted under lax origination criteria; thus, when said portfolios were taken out of balance??, they transferred the whole risk to the markets, and therefore, the incentive to reinforce the origination criteria slowly weakened, thus creating a vicious circle. nvestors in subprime MBSs based their d. purchase decision on the ratings awarded by the agencies—particularly AAAs—with very scarce analysis of the credits included in the portfolios.

During 2006, defaults on subprime mortgages with a variable interest rate began to rise considerably; by the end of 2007, over a fifth of these loans showed defaults of over 90 days, or were already involved in legal proceedings.

The prices of the securities on the market, backed by subprime mortgages, suffered declines, leading investors and various financial intermediaries guaranteeing the issue to answer margin calls and record losses in their balance sheets, which caused more than a few to file for bankruptcy.

To avoid the effects of this crisis on the US economy, the Federal Reserve23 (FED) took the following steps, among others:

Joint work with various agencies to •promote following prudent credit and collection procedures among mortgage banks and lenders regarding the modification of terms of credit; payment differentiation or extension of credit deadlines; capitalization of the amounts due; and the conversion of variable rate loans to fixed rate loans.It collaborated with community groups •to aid homeowners avoid foreclosure.In order to prevent similar situations in •the future, the roots of the crisis are being analyzed with the help of other institutions to improve risk management practices. Measures and processes will be generated to ensure that borrowers obtain a mortgage

with an adjustable-type interest rate that they can pay or refinance without being fined for prepayment; rules will be created to avoid coercion of lenders and appraisers; also, the maximum commissions of the mortgage broker will be established24.In order to counter the negative economic •conditions, the Federal Open Committee (FOMC) cut its fed funds rate by 300 basis points (from September 2007 to March 2008).Together with the Treasury Department, •it agreed to authorize the bailout of Fannie Mae and Freddie Mac, members of the Government-Sponsored Corporations (GSCs)25, after the lack of confidence in them translated into losses of over 50% of their stock value. The bailout package considers an increase of US$2.25 billion in their public credit lines, as well as the Treasury Department’s possibility to buy stock in both companies, and other State moves to guarantee the entities’ stability; meanwhile, the FED approved the possibility to grant loans to the companies if necessary. Both companies have nonetheless defended their capacity to weather the storm with their own resources.

Still, the outlook for the growth of US economic activity has been deteriorating. GDP for 2008 is estimated to grow 1.3%, vs. the 2.2% rise seen in 2007.

The impact of the crisis arose from various sources:

Investors worldwide lost confidence in a. the mortgage market.

In the US, there was a loss of liquidity •in the debt market, and significant losses were recorded in the balance sheets of large companies. In the third quarter of 2007, the losses amounted to over US$8 billion (P$85.57 billion)26, and are estimated to continue rising throughout 2008.

23.The FED has the authority to supervise and regulate financial institutions and their activities. It works with other authorities on a federal and state level to ensure the innocuousness and soundness of the banking industry, the stability of the financial system, and the fair and equitable treatment of consumers in their financial transactions.24.In December 2007, the FED issued rules (subject to review) applicable to all mortgage banks forbidding unfair or deceptive practices in the mortgage market, and which establish registers for loan-granting to ensure that the borrowers receive credits with reasonable conditions based on their financial situation.25.GSCs are entities offering financial services, designed to maintain and increase the liquidity in the strategic sectors for which they are created26. Exchange rate to settle foreign-currency-denominated debt; settlement date is March 31, 2008.

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The central banks of countries such •as the US, Japan, and the European Union began to inject significant sums to maintain the liquidity of their financial systems.The main stock exchanges of the world •registered negative variations in their stock indices, resulting from investors’ fears of a possible recession in the US and in international markets.

There is an increase in materials, and b. a shortage of labor and machinery leasing, affecting construction costs, and therefore, leading to a slowdown in home acquisitions.The dollar fell against other currencies, c. and Mexican’s remittances dropped as well.

Up to July 2008, the effects of the US slowdown on the Mexican economic have been partially mitigated by various factors, namely27:

The recession in the US economy began •in the real estate sector and its effects in Mexico appeared mostly in the financial markets. An example of this was the 0.35% reduction in the benchmark index (IPC) on July 14, 2008, to accrue a drop of 3.62% after the 19% decline in the value of Fannie Mae’s and Freddie Mac’s stocks. This contrasts with the crisis in the industrial sector in 2001, where Mexican productive activities were directly affected.There was an extraordinary increase in oil •revenues due to the hike in prices.The level of non-oil exports has remained •stable in face of greater diversification and the real depreciation of the peso against currencies other than the US dollar.

Mortgage lending has continued to grow, whereas credit to private companies remained flat in the first months of 2008.

Effects of the Mortgage lending crisis in the US and Mexico

Despite the severity of the problems that the US mortgage market is facing, the effect in Mexico is not direct due to the negligible incidence between the mortgage markets of both countries; however, in market niches such as vacation housing in Mexico, there may be indirect impacts as, during the period of apparent economic recession, US consumers become more cautious and some even put off their purchase and investment decisions until better times.

To this effect, the available information shows that:

Over 50% of the baby boomers purchase 1. their second vacation home in cash, as this is an investment they have programmed long in advance. That is to say that purchase decisions in this segment won’t show changes.There are other cases in which the 2. purchase of a residential vacation home is an investment that uses the savings-patrimony amassed throughout their working life. It is estimated that this segment which represents 13% of buyers will indeed affect the market, as the contraction of the US economy modifies Americans’ decision to travel, causing a downward scenario for short-term profit margins, and generating a potential decline in the percentage of occupancy of these dwellings.Nonetheless, so far, companies’ 3. experience regarding the sale of vacation housing to “baby boomers” in Mexico offers the certainty of a safe investment and patrimonial profitability in the long term, which has favored an expansionary cycle for this product and the properties’ appreciation.

27.Banco de Mexico, Report on Inflation, January–March 2008.

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In conclusion, with the most recent reports available, sales appear flat up to the fourth month of 2008, but the growth rate has moderated from last year. This could indicate that the net effect of the crisis represents a decline in the market’s growth rates.

Because it is the real estate market, the effects appear with a delay compared to other sectors, and also have different behaviors based on each tourist destination, but there is still a lack of data to be able to draw a clear trend.

2.1.3 Purchasing power for higher value dwellings due to the cost reduction in the mortgage market

The purchasing power for housing in Mexico has increased in the last five years; currently, a borrower with a monthly income of four General Minimum Wages (GMW) can purchase a dwelling worth 39% more than what they could buy in 2002, which means moving up from an social-type dwelling to an economic one28.

28.Based on the classification of housing types in the Law of Transparency and of Promotion of Guaranteed Credit Competition.29.Encuesta Nacional de Ingreso, Gasto y Hogares (ENIGH) (National Survey of Income, Spending, and Households), 2006.

This increase has come about through several factors:

Households’ income has risen 11% in real a. terms. In 2000, families who earned under three GMW represented 40.7%; by 2006, this percentage had dropped to 34.5%29 (see Figure 1 and Graph 11).

Figure 1. Quarterly average current monetary income per household, by deciles of households (constant 2006 prices)

Decilyear

2000 2006

percentage variation

2000-2006

IIIIIIIVVVIVIIVIIIIXX

$2,698$5,826$8,064$10,474$13,263$16,752$20,936$27,279$39,509$96,131

$3,320$7,174

$10,042$12,739$15,845$19,506$24,246$31,472$43,796$99,215

23.1%23.1%24.5%21.6%19.5%16.4%15.8%15.4%10.9%3.2%

Total $24,093 $26,736 11.0%

*/ Includes households with zero incomes

Source: Created by SHF with ENIG 2006 data.

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A reduction in the b. intermediation margins of Banks and Sofols (non-bank banks), as well as in the long-term government interest rates (10-year Udibonos), in a stable macroeconomic environment with greater competition between financial intermediaries, has allowed for a reduction in the borrowers’ payment per thousand pesos (see Graphs 12 and 13).

9.00%

10.00%

11.00%

12.00%

13.00%

14.00%

15.00%

-02 -03 -04 -05 -06Dec - 07

fina

l rat

e

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

sofo

l mar

gin

Graph 12. Final rate and Sofol margin SHF Dwelling Funding Credits in 25-year UDIs Economic housing

Source: Created by SHF.

Dec Dec Dec Dec Dec

final rate

sofol margin

Moreover, the price of housing in Mexico has increased in the last few years; nonetheless, this rise has been moderate compared to what has happened in the US, where prices (didn’t necessarily) reflected the real value of the dwelling, leading to a speculative bubble that translated into increased risk for lenders (see Graphs 9 and 10 in section 2.1.2.).

Graph 11. Households by monetary income (percentage distribution by GMMW range)

2000

2006

34.6%

40.7%

7.6%

6.3%

22.0%

18.7%

4.5%4.7%

6.1%5.1%

8.0%7.3%

12.3%

16.8%16.3% 15.9%

10.3%

13.1%13.2%

11.1%

0%

5%

10%

15%

20%

25%

less than 1 8 and more7 to 86 to 7 5 to 64 to 53 to 42 to 31 to 2

Source: Created by SHF with ENIG 2006 data.

Fact

or d

e pa

go

Graph 13. Payment per thousand pesos Fondeo Casa SHFCredits in 25-year UDIs

Economic housing

Source: Created by SHF.

2002 2003 2004 2005 2006 2007

11.87

9.00

9.64

10.35

9.97

10.99

9.50

12.00

11.50

11.00

10.50

10.00

9.35

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2.2 Social Production of Habitat

The costs and market conditions for acquiring a dwelling, based on income levels, have restricted lower-income families’ possibilities to purchase a home.

The analysis of housing supply and demand leads to the conclusion that over 50% of the population still lacks the resources to gain access to a dwelling of the sort currently offered by the formal market in the country.

Through the Social Production of Habitat (SPH), via the process of self-production, which includes self-building, the huge potential represented by society’s capacity to solve the housing problem is channeled. Through collective actions, the social sector seeks to reduce the housing backwardness (unserved deficit of new housing and the needs of home improvement), as well as dealing with the new housing needs (resulting from the formation of new households and the natural deterioration of the housing stock), which arise year after year.

Despite its potential for being developed, SPH has generally lacked government support (levels: federal, state, and municipal), to fight the backwardness in the matter.

The financing schemes focus on the acquisition of new housing, which represents a costly and hardly accessible solution for the population with lower incomes, or salaries equivalent to four Minimum Wages.

In 2007, some significant steps were taken towards the integration of a system of Instruments of Support for the Social Production of Habitat.

The surveys that the federal government carried out for the creation of the National Development Plan (NDP)30 and the National Housing Program 2007-2012: towards a sustainable housing development (NHP) made it possible to collect and include some strategic guidelines to boost and acknowledge this form of production.

Thus, with regard to the axis of competitive and employment-generating economy, the NDP states

the importance of “promoting the improvement of the existing dwellings and the conditions to boost progressive housing and SPH, through new alternatives of financial products and aids for the lower-income population” (strategy 17.7).

On the axis of equal opportunity, regarding the issue of poverty, the commitment is established to promote “communities’ democratic participation (...) in the decisions regarding the steps to be taken in the various programs” (strategy 1.4) and to increase the direct intervention of the State in “the design and implementation of ambitious programs for community development, promotion of new sources of employment and income, self-production of housing, and improvement of habitat” (strategy 1.5), for which it proposes “to promote the responsible participation of the civilian society in the fight against poverty”, stating that their organizations make it possible for “the citizens and communities themselves to decide what to do, how and when, through the creation of associations and social networks founded in trust and cooperation” (strategy 1.6).

The NHP 2007–2012 includes in greater detail the steps that lead to the definition of the contents of the Housing Law regarding Social Production; it incorporates the topic of sustainability linked to industrialized housing—a concept that must be extended to the urban environment and to SPH. Sustainability is one of the central axes of the new housing policy, emphasizing the need to accommodate savings, credit, and subsidy plans.

Due to the importance of SPH, the Federal government is promoting this form of production through CONAVI. This Commission is in the process of integrating into its structure a small administrative unit to promote steps that will lead to streamlining the integration and setting in motion of the support system necessary to expand the coverage and efficiency of the Social Production of Habitat. The need has also been stated for the State Housing Institutions (OREVIS in Spanish) to include into their structure a unit in charge of this topic, and to participate in a training program designed for officials and technicians.

30.Full version of the National Development Plan 2007-2012 at www.pnd.calderon.presidencia.gob.mx

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Likewise, the SPH Committee was formally created within the National Housing Council31, as a space for interlocution with social organizations and their advisors, with the goal of supporting, based on concrete experiences, the design of the instruments and operating mechanisms in consultation with Sociedad Hipotecaria Federal (SHF), BANSEFI, some OREVIS, and Microfinance companies. Through this committee, SPH needs have been identified, making it possible to establish agreements with the first execution entities of subsidies destined to social producers operating in various regions throughout the country. Although the actions and resources managed by said entities have been few so far, the stage has been set for a more fluid and abundant operation throughout 2008.

In December 2007, the First Encuentro Nacional de Producción y Gestión Social del Habitat, organized by CONAVI, Iberoamericana University (UIA), and Habitat International Coalition(HIC) was held with over 300 participants, and the conceptual and strategic bases for the Social Production of Habitat, as well as national and Latin American experiments in their various modes were presented. These initial experiments and the results of an evaluation of the social impact of the 2007 subsidy program will make it possible to adapt the criteria and procedures used in the allocation of subsidies for SPH.

Among the remaining concerns are the difficulty to measure SPH on the national territory, both qualitatively and quantitatively. There is the hope that, as the implementation of the Service System for this type of housing advances, criteria to enable a reliable measurement will be established. It is difficult to register housing built without any type of formal registration by the local authorities; there is no mechanism to concentrate the information of the dwellings that had some type of construction permit. It is even more difficult to record SPH, due to the progressiveness of the construction of the dwelling generally implied by this format.

The preliminary yearned 2007 figure of the Financing Program32 reports the line of improvements, including actions of lots with services and self-production or self-construction of dwellings under the “Esta es Tu Casa” program; this record set the bases for the 2008 program; however, to date, said program does not specify the information regarding SPH actions nationwide.

Of the 196 thousand 307 subsidies granted by CONAVI up to August 10, 2008, 98 thousand 397 were granted for home improvement, 5 thousand 591 subsidies were for self-production, and 422 for the purchase of lots with services. However, it is not yet possible, in the case of improvements, to specify how many were applied through SPH.

2.3 Estimates of housing needs and demand

2.3.1 Housing Needs 2006-2012

For the 2006-2012 period, the housing needs throughout the country are estimated at around 4 million 427 thousand new dwellings and over 2 million 930 thousand home improvements. On average, an annual 633 thousand new dwellings and 455 thousand home improvements are necessary. These figures translate into a change

in the trend and behavior of the components considered in the calculation of housing needs.

While the average of new dwellings required declined from the previous period (2001-2005), the concept of home improvement has increased, due to the public policies applied in the last few

31.Consulting and advisory authority of the Federal Executive branch whose goal is to establish measures for the plann