BY CAM RENAUD
And I’m not just talking about the temperature. As recently as a decade ago Mexico was seen as a fledgling economy with sluggish growth, a huge lower class, poor wages and high unemployment. These days a Cinderella story has emerged with Mexico being one of the few global bright spots for economic growth. The IMF, the international financial institution that provides loans to financially strapped countries, recently upgraded its 2024 projection for growth in Mexico’s economy to 2.1% from 1.5%. The IMF cited record low unemployment and record high capacity utilization rates as key supports for this statement.
Mexico can also boast about having one of the fastest-growing middle classes globally – the income cohort that not only fuels but sustains most economies. This stellar story contrasts with the US economy for which the IMF forecasts growth at a mere 1.1% as a result of higher interest rates. The US will be lucky to avoid a full recession as service costs on mountains of debt at both the government and consumer levels drag the economy to a virtual standstill.
Add this to the various sources of disarray within the US government and the shortage of goods coming out of China after Covid shutdowns limited production, and it becomes easy to understand why Mexico is becoming a more attractive option, and how it will benefit from American companies who are being urged to “onshore” or “nearshore” their production. The Mexican economy is on the right path as it continues to develop prudent economic policies aimed at attracting direct foreign investment and reining in corruption. The IMF referenced higher and better targeted public investment, better governance, increased access to better domestic sources of finance and increased female labor force participation as items which would maintain the growth trajectory.
However, there are still challenges to overcome. Most recent reports out of Mexico City note annual inflation as declining for 8 consecutive months, but it is still running at 4.4%, not yet at its annual 3% target. Also, somewhat problematic for Mexican borrowers is the base interest rate at 11.25%, punitive by any measure. Unfortunately, as Mexico’s expected government spending increases there will be pressure to raise domestic interest rates which in turn will likely cause the peso to strengthen versus the US dollar. This means your US dollar would then buy fewer pesos.
Whether you think that the prospects for Mexico look good or that the prospects for the US economy look bad, it’s undeniable that Cabo is gaining a profile as “the most active and highest in the demand property market in Mexico”. This once sleepy tourist destination is attracting staggering amounts of real estate investment money and, as you can plainly see when driving along the corridor, there is little end in sight with new construction.
Historical market data for all of 2013 showed US$257 million in local real estate sales (houses, condos and land) while the 9-month data to September 30th of this year came in at US$1.37 billion. That’s an unprecedented 7X increase in just 10 years matched with 1,833 closed sales in just 9 months. The 857 condos sold during the same period commanded a lofty average price of US$714,000 – with an emphasis on average. Bare land sales for 472 properties fetched an average price of US$391,000. Good news to owners, although a double-edged sword for others. Assuming land is bought not only for speculative purposes but also for residential buildings, continued demand for construction workers can be expected to push up demand and prices on lower-end rental properties and put a strain on affordable housing. The economic ripple effect on the local economy can be better described as an economic tsunami as businesses of all sizes are seeing demand far beyond what they could have imagined for their goods and services.
The success of Los Cabo is also very much a story of the right place at the right time. North American baby boomers, the largest group of buyers in Cabo, are experiencing “the grey wave” of intergenerational wealth transfer in unprecedented proportions. The wave is expected to continue for at least the next 2 decades as already successful baby boomers are inheriting US$16 trillion over the next 10 years with US$84 trillion to be passed along to their heirs by 2045. If you’re thinking that the current real estate boom in Cabo may just be a bubble, better think again; it’s just getting started. Ironically, it looks like Cabo is more at risk of pricing itself out of the market than facing a real estate market bust.
So, my fellow Gringo readers, if you are part of the swell creating the grey wave and happen to already own in Cabo, grab a cold one and enjoy the ride.