Today’s Soapbox opinion was written by Wol Birch Reynardson, Founder & Co-CEO at Casa Bravo.
Contxto – In the last twenty years, home ownership in Mexico has slumped from 79 percent in 2000 to 59 percent in 2019.
This is not out of choice—for example, due to a growing lifestyle preference for renting—. According to an HSBC study, 94 percent of millennials in Mexico aspire to buy a home in the next five years.
The brutal reality is that most of them won’t be able to.
Funding deficit in home ownership
In Mexico, the dream of home ownership has been made increasingly unattainable by an expensive and restrictive mortgage market. This combined with years of house prices growing more than incomes.
Mexico needs more housing stock at an appropriate price point. But it also needs a new, affordable, accessible, and responsible approach to home financing.
This problem is not going away. Over the next decade, it is estimated that an average of 720,000 new households will be formed every year.
Mortgage availability is moving in the opposite direction. The annual number of mortgages provided by the main financing programs for the purchase of homes is down 20 percent since its peak in 2008. In 2019, the number stood at around 500,000.
There is a significant funding deficit that traditional lenders have proven unable to accommodate.
Rent to buy in Mexico
Rent-to-own is one solution to this dilemma. With its unique risk profile, it can provide the missing rung on the housing ladder for this fast-growing demographic.
In doing so, it will prove an attractive new investment opportunity.
Rent-to-own has existed in various forms over many years. But a more technology enabled, customer-friendly version of the product has sprung up globally in the wake of the Great Financial Crisis.
The product aims to help aspirational homebuyers who lack the necessary credit profile or sufficient savings to qualify for a traditional mortgage. With significantly fewer upfront costs than a mortgage, tenants can build equity in the home each month at a pre-determined price whilst they rent.
With an improved credit profile and their accumulated equity in the home, they could be eligible within a three to five-year program for a competitive mortgage to complete the purchase of the home.
If the customer decides they no longer want to buy the property, they can redeem the savings they have built up during the program. It is an accessible, affordable, and flexible way to start the journey of homeownership.
Housing needs innovative solutions
Covid-19 is having a severe social and economic impact in Mexico and globally. One of the few silver linings is the growing willingness among consumers to embrace companies with predominantly online offerings.
This should benefit the wave of young companies across the region, using technology to deliver simpler, more accessible, and more competitive financial solutions to serve the needs and aspirations of the population.
Rent-to-own can help the recovery of the housing market in Mexico and the economy in general. Home equity as an investment and savings mechanism is inaccessible to an ever-growing proportion of the population. This contributes to a cycle of financial exclusion and weak economic growth.
Through the creation of homeowners, rent-to-own programs can help to reverse these trends.
Wol Birch Reynardson is Founder & co-CEO at Casa Bravo.