EcoCasa and Mexico’s Green for All Housing Recovery

Is it surprising that Mexico’s housing markets are already starting to recover, if slowly, from the housing crisis of two years ago? Not really.

After all, Mexico has an unmet housing deficit of 9 million units. About 40% of that gap is for new housing and the rest for improvements. Single adults, couples and families still form new households and need housing even while bank lending is slow and thousands of abandoned houses still stain the suburbs.

What’s surprising is that EcoCasa, an initiative to promote and finance affordable sustainable housing, is fueling Mexico’s housing bounce.

EcoCasa is a green housing program hub. It brings together public and private housing market players in Mexico. Government agencies include those in charge of building inclusive housing markets and mortgage financing, planning and urban policy and worker pension funds. On the private side, EcoCasa works with housing developers who build to its sustainability standards and with banks that provide construction loans and mortgages.

Although EcoCasa was born out of the previous administration of President Felipe Calderon and the 2010 global climate talks in Cancun, the current administration of President Enrique Pena Nieto enabled the program to take shape and fly, especially to come up with innovative financing vehicles and to execute on the mandate of the program. Even if the climate talks in Cancun didn’t achieve a hoped-for comprehensive deal, in Mexico, EcoCasa was launched in February 2013 to lead the financing for thousands of energy efficient houses and extended technical assistance to several developers in Mexico to go green.

Why low cost financing? EcoCasa is already halfway to its goal of financing 27,600 sustainable homes and 600passive houses (at least 80% reduction of CO2 emissions) by 2019. It also plans to generate savings of 1 million tons of C02 equivalent – all while delivering houses that are more comfortable for their residents.

To reach this goal, EcoCasa has to channel low-cost funding to developers to integrate new green building practices into their businesses from end to end. While the industry in Mexico has to adapt to climate change eventually, financing at concessional rates accelerates developers’ ability to advance the low carbon, climate-resilient urban agenda.

Source: EcoCasa

EcoCasa’s research has found that the incremental cost to make housing energy efficient is relatively low, but transforming business-as-usual in homebuilding is expensive and difficult. Green housing in Mexico is a particular challenge because of the country’s varied climates from cool temperate zones to arid, hot, water-stressed desert. Sometimes houses need insulation, sometimes solar heaters.

With no quick solution, the transformation requires process re-engineering, training across the board, new sourcing capacities and much more. While companies in other sectors have achieved these supply chain improvements, homebuilding lags in innovation globally.

In 2007, Infonavit’s Hipoteca Verde also started to boost the demand side of low income households for houses that incorporate energy and water efficient measures. This helped develop a supportive clean tech supply response for the housing market. However, this homebuyer segment is price sensitive and still need education on the benefits of energy and water efficiency.

In addition, regulatory shifts triggered by the Pena Nieto administration’s rethinking of urban housing policy have increased risk aversion among homebuilders. So, the marketing and reputational benefit of building green for the masses doesn’t generate enough push for homebuilders to innovate on their own.

Low cost finance basically absorbs the cost of ramping up for private developers. It gives the market a “kick start.”

To do just that, more than $225 million in total financing has been committed by the German Development Bank (KfW), the Inter American Development Bank (IADB), the Clean Technology Fund through the IADB, and the EU’sLatin America Investment Facility (LAIF). A new tranche of funding to expand the program is already on the way.

Market creation is no walk in the park. Mexico’s housing agencies have a mandate to advance low carbon and climate resilient growth because the benefits are still mostly public goods. Housing is significant because it represents 17% of total energy consumption and almost 5% of CO2 emissions.

EcoCasa is the first program to support developers with new concepts for products and total collaboration with each developer who undertakes the process. According to Ernesto Infante Barbosa, EcoCasa’s Deputy Director for Multilateral Affairs and Sustainable Housing Development, EcoCasa is making a difference precisely because “explaining the benefits to developers and encouraging them to innovate in energy efficiency is the major challenge.”

All the developers in the program require training from top management to the subcontractors. To make new investments in windows, walls, doors, boilers and finishes (to name a few), all technical areas of the company have to be involved. Those who go through the process also give EcoCasa’s team feedback to improve the assessment and evaluation process. On the other end of the training, developers must meet stringent criteria on energy efficiency and carbon savings relative to a baseline in order to receive the concessional financing (see graphic below).

Only a program like EcoCasa could have brought in the needed expertise to make it happen. It’s no less than transformational change.

Pushing boundaries and building momentum. The growth of the program and the trend is no flash in the pan. It’s meaningful by any measure: 7% of GDP is driven by construction in Mexico, so the country needs a resilient, sustainable housing industry.

Infante thinks housing developers are pleased with the program. 15 developers have participated so far, including small and medium-sized developers, who build most of Mexico’s affordable housing. They’re developing new skills and rethinking their products. It’s been successful enough that EcoCasa is receiving another EUR 50mn disbursement from KfW to continue to build the program.

Challenges and frontiers. EcoCasa’s next frontiers will challenge the model of partnering, training and financing new housing. Technical assistance for developers has to adapt and build on what’s been learned so far. Financing will have to become more efficient. The biggest developers, those at the heart of the crisis, will hopefully get on board.

Much lies ahead – a new web page to facilitate developer engagement, performance monitoring to ensure the energy performance of the houses, the shift from horizontal to vertical development and more education to improve buyer demand for the EcoCasa standard house.

Policy is changing as well. Social housing policies are more strict in the wake of the crisis. Municipalities are subsidizing housing as well. The policy shift toward incentivizing more urban multi-family development from periurban single family homes hasn’t taken place, but will create new demands on EcoCasa.

EcoCasa is going the extra mile, looking at housing in its broadest context. Centro Mario Molina and UNAM are developing analytics for total life cycle assessment (LCA) of housing. This would recognize the full cost of transport infrastructure (or lack of) to arrive at a total costing. The aim is that this will help make Mexico’s cities more compact.

Moving the horizon out further, the Latin America Investment Facility will also finance a pilot intended to develop 600passive houses with 80% efficiency over baseline.

The most important challenges are the most entrenched – rule of law in land and real estate, land administration closer to city centers, housing improvements, rural housing. These are all big questions that Ernesto Infante insists will be the future of EcoCasa and Mexico’s housing landscape.

EcoCasa will have to keep proving itself after this strong start. The proof will ultimately be in the uptake of these new practices by developers and in demand from entry-level and lower income homebuyers.