When the Price of Everything Doubles: Jamaica’s Property Market at Mid-1993 and the Inflation That Is Rewriting Every Number

Imagine a building whose floor plan is entirely sound — well-designed rooms, logical layout, solid underlying structure — but whose every dimension has been measured in a unit that changes value daily. The room that was twelve feet wide last month is still twelve feet wide today, in the sense that the physical space is unchanged. But the number — twelve — means something different this month than it meant last month, because the foot itself has been redefined. Now apply that problem to a property market in which every price, every mortgage payment, every construction cost, every land value is denominated in a currency that has lost more than half its purchasing power in the past two years. Buyers and sellers are negotiating in a language whose vocabulary is changing faster than either side can track. Mortgage payments that seemed affordable when the loan was signed have become crushing under the weight of the income erosion that inflation has produced. Construction costs that underpinned a development feasibility study twelve months ago have doubled, making the project unviable at the prices the market will bear. This is Jamaica’s property market in the summer of 1993 — a market in which everything nominally still exists but in which the numbers have been so thoroughly disrupted that the market cannot perform the function of price discovery that is its fundamental purpose.

The year 1993 finds Jamaica’s economy in the grip of a structural adjustment programme that is, by any measure, the most severe macroeconomic intervention the island has undergone in its post-independence history. The foreign exchange liberalisation of 1991 — the abandonment of the Jamaican dollar’s fixed peg to the US dollar and the introduction of a market-determined exchange rate through the cambio system — had consequences whose full depth is still being felt in mid-1993. The exchange rate has fallen from approximately J$7-8 per US dollar at the point of liberalisation to levels that are now approaching J$25-30, with continued pressure that makes any specific number quoted here likely to be obsolete within weeks. Inflation has followed the exchange rate collapse with the lag that always characterises the transmission of currency depreciation into domestic prices — and when it arrived, it arrived at rates that have imposed real income losses on virtually every Jamaican household.

Reviewing 1992: The Year the Old World Ended

The year 1992 was the year Jamaica’s property market had to recalibrate everything it knew. The liberalisation of the foreign exchange market in September 1991 had, by the opening months of 1992, produced a currency depreciation whose speed and scale were without precedent in the island’s modern economic history. The Jamaican dollar, which had been maintained by the Bank of Jamaica at a managed rate for decades, was now finding its market level. And the market, assessing the structural weaknesses of the Jamaican economy — the fiscal deficit, the current account deficit, the inadequacy of reserves relative to external obligations — was setting a level dramatically below what the managed rate had suggested.

For property owners, the 1992 depreciation created a peculiar form of wealth destruction that many did not immediately recognise. The nominal Jamaican dollar value of their properties had not fallen — indeed, as inflation took hold and the replacement cost of construction rose sharply in Jamaican dollar terms, the nominal Jamaican dollar value of existing properties was, if anything, rising. But the US dollar value of those properties had fallen by more than half, and for any owner whose financial obligations, consumption needs, or investment alternatives were partly denominated in foreign currency — which, in a small open economy dependent on imported goods, effectively meant every Jamaican — the real purchasing power loss was substantial.

Mortgage borrowers faced a specific form of this challenge. Those who had borrowed at fixed Jamaican dollar interest rates before the liberalisation found that their real debt burden had been eroded by the inflation, which was, perversely, the one silver lining of the inflation for borrowers who could maintain their payments. Those who had borrowed at variable rates — or who needed to refinance during 1992 — faced a very different situation: the Bank of Jamaica’s tightening of monetary policy to control the inflation was driving interest rates to levels that made new or refinanced mortgage debt extraordinarily expensive. Rates that had previously been in the 20-25 percent range were being pushed toward 40-50 percent, nominal, in an effort to make Jamaican dollar deposits attractive relative to the alternative of converting to US dollars.

The property development sector essentially stopped in 1992. The arithmetic of development — construction costs in Jamaican dollars rising with inflation, sales prices in a market where buyers were struggling with their own income erosion, financing costs at rates that made any development requiring borrowed capital unviable — produced feasibility studies that showed losses at virtually every price point. Developers who had committed to projects before the liberalisation were caught between the rising costs of completion and the inability to sell completed units at prices that covered those costs. The new construction that had been planned or underway in 1991 was halted, deferred, or abandoned across the market.

Why Liberalisation Happened and Why It Had to

Any analysis of Jamaica’s property market in 1993 must grapple with the question of why the 1991 liberalisation happened — because the disruption it caused was so severe that it requires justification that goes beyond the mechanics of macroeconomic adjustment.

Jamaica had maintained a managed exchange rate for decades as part of a broader system of import controls, capital controls, and state direction of the economy that characterised the Manley government’s economic model of the 1970s. By the late 1980s, this system was visibly unsustainable: the managed rate bore no relationship to the rate at which Jamaicans could actually exchange currency in the informal cambio market that had developed as a parallel economy alongside the official system, and the distortions it created — in the allocation of scarce foreign exchange, in the incentives facing exporters and importers, in the treatment of remittances — were becoming increasingly severe and increasingly costly to maintain.

The liberalisation that the Seaga government began and the Patterson government completed was, in this context, not a choice between a good option and a bad one. It was a choice between a managed adjustment — painful, disruptive, but deliberate — and an unmanaged crisis — more painful, more disruptive, and entirely uncontrolled. The inflation and the depreciation that followed liberalisation were not the costs of a bad decision. They were the revelation of the true cost that the managed rate system had been deferring and concealing for years. The pain of 1991-1993 was the deferred payment of a debt that had been accumulating since the 1970s. That understanding does not make it less painful. But it does explain why the alternative was not available.

The Property Market in Mid-1993: Numbers Without Meaning

In mid-1993, Jamaica’s property market is a market in which the numbers have lost their meaning. A property listed at J$5 million in 1991 that is now listed at J$7 million in nominal Jamaican dollar terms looks more expensive. But it is cheaper in US dollar terms than it was two years ago, because the exchange rate has moved from J$7 to J$25 per dollar. Whether it is cheap or expensive depends entirely on which currency you use to measure value — and that question, which sounds academic, is intensely practical in a market where buyers have different foreign currency exposures depending on their source of income, their savings history, and their consumption patterns.

Formal transaction volumes are extremely low. The NHT is continuing to lend, but the real value of its fixed loan ceilings has been eroded by inflation and depreciation to the point where NHT loans cover a smaller proportion of the cost of the properties the NHT has historically helped to finance. The building societies that remain active are operating at rates that make their loans accessible only to a very small proportion of potential borrowers. Most of the transactions that are completing in mid-1993 are cash transactions — diaspora-funded, returning-resident-funded, or funded by the small population of households whose incomes are partly foreign-currency-denominated and who benefit from the devaluation in ways that Jamaican dollar earners do not.

Looking Ahead to 1994: The Light at the End of a Very Long Tunnel

The forecast for 1994 is tentatively hopeful for the first time in two years. The Bank of Jamaica’s monetary tightening is working: inflation is declining from its peak, and the exchange rate, while still under pressure, is showing signs of stabilisation at a level that, however painful, at least provides a reference point from which the property market can begin to rebuild its pricing framework. The structural adjustment programme, whatever its costs, is beginning to produce the macroeconomic stabilisation that was its objective.

For the property market, the most important signal to watch in 1994 is not property prices themselves — which will be distorted by the repricing of Jamaican dollar assets relative to the new exchange rate for years yet — but the availability of credit. When building society mortgage rates decline from their current extraordinary levels to rates that allow a meaningful proportion of the professional and working class to qualify for formal finance, the market will have the fuel for genuine recovery. That decline will come as inflation falls and as the monetary policy required to control inflation is relaxed. It will not happen overnight, and it will not happen in 1993. But the trajectory that leads there — lower inflation, lower rates, renewed credit availability, recovered buyer confidence — is the trajectory that the structural adjustment is designed to create.

The building site of 1993 is not yet a building. The ground has been broken, reluctantly and at enormous cost. The foundation trench has been dug. What goes into that trench — the quality of the concrete that will support everything that comes above it — will determine the strength of what Jamaica builds on this painful ground. Get the foundation right, and what rises above it can be sound. Get it wrong, and the cycle begins again. In mid-1993, Jamaica is still in the foundation-pouring phase. The concrete is being mixed. The outcome is not yet determined.