The Cambio Shock: Jamaica’s Property Market at Mid-1992 and the Devaluation That Changed Everything Overnight

There is a type of structural survey that reveals not the building’s current condition but the building’s true condition — what it has always been, beneath the plaster that concealed the damp, beneath the paint that covered the cracks, beneath the carpets laid over floors that were never properly levelled. The survey does not cause the problems it reveals. It merely removes the concealment. Jamaica’s foreign exchange liberalisation of September 1991 was that kind of survey. The problems it revealed — the true value of the Jamaican dollar relative to currencies that commanded real international purchasing power, the true cost of the import dependency that had been artificially subsidised by the managed exchange rate, the true fiscal position of a government that had been financing its deficit through mechanisms that the liberalised market would no longer sustain — were not created by the liberalisation. They had been present for years, accumulating behind the plaster of the managed rate. The liberalisation merely removed the plaster. The scale of the damage it revealed is what makes 1991-1992 the most disorienting period in Jamaica’s post-independence economic history. And the property market, like everything else denominated in Jamaican dollars, is living with the consequences of that revelation in the summer of 1992.

Writing in July 1992, this column confronts a property market that is almost impossible to describe in conventional terms because the conventional terms — prices, values, affordability, yields — have been rendered unreliable by the scale of the monetary disruption through which the island is still passing. The exchange rate, which stood at approximately J$7-8 per US dollar at the point of liberalisation in September 1991, has now moved past J$20 and continues under pressure. Inflation is running at rates that the official data, constrained by collection methodology, understates but that any Jamaican household doing its weekly shopping can confirm has been severe and cumulative. The Bank of Jamaica, in its efforts to stabilise the currency and reduce inflation, is maintaining interest rates at levels that make commercial mortgage lending economically impossible for all but the most creditworthy and highest-income borrowers. Jamaica’s property market in mid-1992 is not so much a market as a state of suspension — waiting, like the country itself, for the adjustment to work its way through the system and for something resembling stability to emerge from the disruption.

Reviewing 1991: The Year the Map Changed

The year 1991 was the year Jamaica’s economic map was redrawn so fundamentally that almost everything that participants in the property market thought they knew about values, affordability, and returns had to be reconsidered from the beginning. The managed exchange rate system that the Jamaican dollar had operated under for decades had created a particular kind of market reality: one in which the nominal prices of Jamaican dollar assets had a fixed and predictable relationship to their US dollar equivalents, in which the cost of imported construction materials had a degree of predictability, and in which long-term financial planning — a mortgage, a development project, an investment in residential property — could be conducted with reference to a currency that, while not perfectly stable, was at least managed within bands that allowed reasonable projections.

The cambio reform of September 1991 ended all of that. The decision to allow the Jamaican dollar to find its market-determined level — justified, as we have argued elsewhere, by the accumulation of distortions that the managed rate had created and by the unsustainability of maintaining a fiction of exchange rate stability in the face of fundamental macroeconomic imbalances — produced a depreciation that was, in its speed and scale, shocking even to those who had argued for liberalisation. Within months of the liberalisation, the exchange rate had moved from its managed level of approximately J$7-8 to the dollar through J$12, J$15, J$18, continuing a depreciation that showed no sign of finding a natural floor at any of the levels that conventional analysis might have suggested.

The property market’s immediate response was a kind of paralysis. Sellers who had been pricing their properties at Jamaican dollar amounts that reflected the managed rate’s implied US dollar equivalents found themselves holding assets whose US dollar value had halved without their nominal prices changing at all. Buyers who might have been considering purchases found that the certainty they needed to commit to the largest financial decision of their lives had been entirely removed by the uncertainty of a currency whose trajectory was unknowable. Developers who had been planning new projects discovered that their construction cost estimates, denominated in Jamaican dollars and based on imported material prices at the managed exchange rate, were now dramatically understated relative to what those materials would actually cost at the market rate.

Hurricane Gilbert’s Continuing Shadow

The foreign exchange liberalisation of 1991 was not Jamaica’s first major property market disruption in recent years. Hurricane Gilbert’s strike in September 1988 had already imposed a massive shock on the island’s physical infrastructure, destroying thousands of homes across multiple parishes and devastating the hotel and resort infrastructure of the north coast. The recovery from Gilbert had been ongoing through 1989-1991 — a combination of insurance payouts, government reconstruction programmes, NHT emergency lending, and the private reconstruction effort of households and businesses who rebuilt their damaged properties.

The Gilbert reconstruction had, in some respects, provided a stimulus to the construction sector that sustained activity at a time when the broader economic environment was under strain. Insurance proceeds flowing into rebuilding, international aid funding public infrastructure reconstruction, and the urgent private-sector priority of restoring the tourism capacity that generated so much of Jamaica’s foreign exchange — all of these created demand for construction labour and materials that kept the sector busier than the underlying economic conditions would have supported.

By 1991-1992, much of the most urgent Gilbert reconstruction was complete. The insurance money had been spent. The international aid flows were tapering. The north coast hotel reconstruction, which had occupied the hospitality industry’s capital and management attention since 1988, was mostly done. The construction sector stimulus that Gilbert had inadvertently provided was ending precisely as the cambio shock arrived — a convergence of negative forces that produced, in 1992, a construction sector in particularly acute distress: the Gilbert stimulus gone, the cambio shock making new development economically inviable, and the interest rate environment making construction financing nearly impossible.

The NHT in 1992: Navigating the Unnavigable

The National Housing Trust‘s position in the 1992 property market is that of an institution designed for normal conditions operating in conditions that are anything but normal. Its administered lending rates — set at levels designed to provide affordability to contributors across the income spectrum — have not been adjusted upward at anything like the pace of the inflation and interest rate explosion. This creates a situation that is both the NHT’s greatest strength and its greatest vulnerability: it is the only institution in Jamaica lending at rates that make homeownership affordable, but it is lending at those rates at a time when the real cost of housing is rising rapidly in both Jamaican dollar and US dollar terms, and when the income levels of its contributor base are falling in real terms as inflation erodes purchasing power.

The practical consequence is that NHT loans in 1992, though still subsidised relative to market rates, cover a smaller proportion of the actual cost of housing than they did before the liberalisation. A property that the NHT’s loan ceiling could have financed in full in 1990 can now only be partially financed by an NHT loan at 1992 price levels — leaving contributors to find the gap from sources that the credit environment has made very expensive. The NHT is doing what it can within its institutional constraints. What it can do is less than what is needed, and considerably less than what it could do before the cambio shock.

The affordable housing schemes in St Catherine and greater Kingston that the NHT supports are still being developed, but more slowly and with more difficulty than in the pre-liberalisation years. Construction costs have risen. Development financing from commercial banks has become harder to access and more expensive. The NHT’s own cost of funds has risen as the institution invests its contributions in a market where fixed-income returns reflect the inflationary environment. And the contributor base it serves is increasingly under income pressure from the same inflation that is making housing more expensive. The institution is rowing as hard as it ever has against a current that has become, in the past twelve months, considerably stronger.

The Diaspora: Jamaica’s Exchange Rate Beneficiaries

In the bleak landscape of Jamaica’s 1992 property market, one group of potential buyers is in an unexpectedly favourable position: the diaspora. Jamaicans living and working in the United States, the United Kingdom, and Canada — earning in currencies whose value has risen dramatically relative to the Jamaican dollar — find themselves, in the post-liberalisation environment, with significantly more Jamaican dollar purchasing power than they had a year ago. A diaspora household remitting US$1,000 per month to family in Jamaica, and occasionally considering the investment of a portion of their US dollar savings in Jamaican property, has seen the Jamaican dollar value of their potential investment grow by 150 percent or more since September 1991 without any change in their income or savings.

This does not mean the diaspora is flooding into the Jamaican property market in 1992. The uncertainty of the exchange rate — which has fallen dramatically but whose floor is not yet established — creates as much hesitation as opportunity: a buyer who purchases at today’s exchange rate and then sees the rate fall further has gained on the current rate only to lose on the next movement. And the instability of the broader environment — the economic disruption, the political uncertainty, the crime concerns that have been a persistent deterrent to returning-resident and diaspora investment — means that many who have the financial capacity to invest are not yet comfortable doing so. But the seed of the diaspora property investment dynamic that will be one of the most important structural features of Jamaica’s market over the next two decades has been planted by the cambio shock. The devaluation has made Jamaican property cheap in US dollar terms. That observation will not be lost on the diaspora forever.

Looking Ahead to 1993: The Adjustment That Must Be Finished

The forecast for 1993 is one of continued difficulty but, potentially, the beginning of the end of the acute phase of the disruption. The Bank of Jamaica’s monetary tightening — the extraordinary interest rates that are the primary tool being deployed to stabilise the exchange rate and reduce inflation — will eventually produce the stabilisation it is designed to achieve. The question is not whether the tightening will work but at what further cost in economic contraction and household income erosion it will do so, and over what timeframe.

For the property market, 1993 will be a year in which survival matters more than growth. The institutions that emerge from the adjustment period with their lending capacity intact — primarily the NHT, the Jamaica National Building Society, and the Victoria Mutual Building Society — will be the ones that are positioned to lead the market’s recovery when macroeconomic conditions eventually permit. Those institutions, and the Jamaican property market as a whole, need 1993 to be the year in which the worst of the adjustment passes. The evidence suggests that it will be — but that the passage will be slow, expensive, and anything but gentle.

The cambio shock changed everything overnight. The restoration of a property market in which buyers and sellers can transact on the basis of reliable values, affordable finance, and credible projections of future value will take considerably longer than overnight. But it will happen. The foundation is still there, beneath the disruption. It always is.

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