Every building has a moment that, in retrospect, was its highest and best. Before the crack that became a fault. Before the settlement that became subsidence. Before the damp that became rot. In that moment, the building is everything it was designed to be and everything its owners hoped it would become. The occupants go about their lives inside it, unaware that the forces gathering in the foundations will, in time, undo what was built so confidently above. Jamaica’s financial sector — and through it, Jamaica’s property market — reached that moment somewhere around 1995. The building was full. The lights were on. The market was rising, confidence was building, and the structural vulnerabilities beneath the floor were invisible to anyone who was not looking for them with specific attention. By mid-1996, the first crack has appeared. It is still narrow enough that optimists can attribute it to settlement. But this column is not written for optimists. It is written for people who look at cracks carefully and ask what is moving beneath them.
The year 1996 is the year Jamaica’s mid-1990s financial and property boom turned. Not with a bang — the collapse will come later, and when it does come it will be loud enough. But with a shift in the ambient conditions: the Jamaica Stock Exchange, which had been rising with the confidence of a market that believed the extraordinary nominal returns of the high-interest-rate era were permanent features rather than temporary artefacts, began its correction in 1996. Century National Bank, one of the most aggressive participants in the lending expansion of the early 1990s, found itself unable to manage its loan book and became the first significant institutional casualty. And the government, surveying the landscape of a financial sector whose exposure to property and equity assets at valuations that were beginning to look unsustainable, quietly established the framework that would, in January 1997, become FINSAC.
Reviewing 1995: The Year Everything Looked Right
To understand the significance of 1996’s turn, one must understand just how confident 1995 looked from the inside. The Jamaican economy had emerged from the brutal structural adjustment of the early 1990s — the exchange rate liberalisation, the fiscal tightening, the inflation spike and subsequent monetary stabilisation — into a period of apparent normalisation that felt, to those participating in it, like the arrival of the prosperity that the painful adjustment had been designed to enable.
The Jamaica Stock Exchange in 1995 was performing with the energy of a market that had convinced itself it had discovered permanent value. The financial sector stocks that had been the primary beneficiaries of the high-interest-rate environment — banks, building societies, and insurance companies whose headline returns looked extraordinary by international standards — were trading at valuations that reflected the expectation that those returns would continue indefinitely. New financial institutions were being established or expanding aggressively, attracted by the margins available in a market where the government’s domestic borrowing requirement was forcing interest rates to levels that created what appeared to be risk-free excess returns for institutions that could mobilise deposits and deploy them into government paper.
For Jamaica’s property market, 1995 was the year of maximum confidence. Property values in the upper Kingston residential communities — Cherry Gardens, Norbrook, Barbican, the hills of St Andrew — had risen substantially from the early-1990s trough, driven by the wealth effect of a rising stock market, the spending confidence of financial sector professionals whose institutions were generating strong apparent returns, and the genuine improvement in Jamaica’s macroeconomic environment relative to the chaos of 1991-1992. Properties that had been modestly priced in the post-devaluation years were now commanding premiums that reflected both the genuine recovery in the underlying economy and the inflated confidence that always accompanies a prolonged bull market.
The north coast resort market was similarly buoyant in 1995. Tourism, recovering from the disruption of Hurricane Gilbert in 1988 and growing steadily on the back of the all-inclusive resort model that had transformed the hospitality landscape of the north coast through the early 1990s, was generating the employment and confidence that supported property values in Montego Bay, Negril, and Ocho Rios. International buyers — American and British retirees seeking Caribbean property, investors attracted by the tourism growth story — were active in the north coast market in a way that had not been seen since the pre-Gilbert years. Villa developments, condominium schemes, and resort-adjacent residential projects were being announced and begun with a frequency that suggested genuine developer confidence in the market’s trajectory.
There was no MLS in Jamaica in 1995. There was no standardised data on transaction volumes or prices. The information environment for property buyers and sellers was, as it had always been, one of personal networks, agent relationships, and the knowledge held by the small community of valuers whose assessments provided the closest thing to objective price discovery the market possessed. What could be observed — the confidence of sellers, the willingness of buyers to pay prices that reflected optimism about Jamaica’s trajectory, the developer activity on the north coast, the new residential schemes being launched in the greater Kingston area — told a story of a market that believed in its own future.
The Turn: What Changed in 1996 and Why
The turn in Jamaica’s financial and property markets in 1996 was not caused by a single event. It was caused by the gradual revealing of the structural vulnerabilities that had been accumulating beneath the surface of the boom. Three developments in particular shifted the environment in ways that matter enormously for the property market.
The first was the beginning of the JSE correction. As domestic interest rates began to normalise from their extraordinary peaks — a normalisation driven by the gradual success of the monetary stabilisation programme in reducing inflation — the financial sector stocks that had been priced as if high-rate, high-margin conditions were permanent began to be re-evaluated. The correction, when it began, was not initially alarming in scale. But its direction was unambiguous. And its implications for the confidence of the professional and business class whose property demand had been supporting upper-market values were, in retrospect, significant.
The second was the emergence of serious questions about the loan quality of several financial institutions that had expanded aggressively in the early 1990s. The loans that these institutions had made — concentrated in property and equity, extended at values that reflected the peak of the bull market, secured by collateral whose value was now declining — were beginning to generate non-performing loan ratios that challenged the sustainability of the institutions’ reported capital positions. The regulators were becoming concerned. Some institutions were being asked to increase their provisions. And Century National Bank, the most visible of the overstretched lenders, was heading toward the failure that would, in 1996, become the first significant institutional casualty of the crisis.
The third was the government’s own fiscal vulnerability. The improvement in Jamaica’s macroeconomic position relative to the early 1990s had been real but partial. The structural deficit — the excess of government expenditure over revenue that had to be financed through domestic borrowing — had not been eliminated, and the domestic debt stock continued to grow. The interest payments on that debt were consuming an increasing proportion of revenue, limiting the government’s capacity to respond to the financial sector stress that was building and constraining the fiscal flexibility that a credible crisis response would require.
The Property Market in Mid-1996: The Peak Without Knowing
In mid-1996, Jamaica’s property market is at or very close to its cyclical peak without most of its participants being aware that the peak has been reached. Sellers in the upper Kingston residential market are still pricing at the optimism levels of 1995. Developers on the north coast are still launching projects based on the tourism growth trajectory of the early-to-mid 1990s. The NHT is processing applications at volumes that reflect the institution’s continued confidence in the affordable housing market, where price points are lower and the exposure to the financial sector bubble is more limited.
The commercial property market in Kingston is showing the first signs of the oversupply that the office and retail development boom of the early 1990s has created. New buildings completed at the peak of the development cycle are finding that the rental market will not absorb them at the rates that justified their construction. Vacancies are rising in segments where they had been negligible two years earlier. Developers who borrowed to build are beginning to discover that the income streams they projected are not materialising at the speed or scale that their financing requires.
The building societies are still lending, but with a caution that was not present in 1994-1995. Qualification criteria are being tightened, not dramatically but perceptibly. The valuers whose assessments underpin mortgage lending are beginning to question whether the peak prices being achieved in some segments reflect sustainable market fundamentals or the temporary enthusiasm of a bull market that may be turning. These are not crisis signals yet. They are the professional instincts of experienced practitioners who have seen markets turn before and who recognise, in the data available to them, the early signs of a shift in direction.
Looking Ahead to 1997: The Reckoning That Is Being Prepared
The forecast for 1997 is made with an honesty that the prevailing optimism of the market does not reward but that responsible analysis requires. The financial sector vulnerabilities that are visible in mid-1996 — the overextended loan books, the declining collateral values, the regulatory concerns about institution solvency, the government framework being built to manage a potential financial sector crisis — are not going to resolve themselves spontaneously. They are going to require either a managed resolution that inflicts significant pain on shareholders and some creditors while protecting depositors, or an unmanaged collapse that is far more destructive of wealth and confidence.
The property market’s forecast for 1997 follows directly from this financial sector outlook. If the financial sector stress is managed effectively through a mechanism like the FINSAC framework being developed, the property market will face a difficult but not catastrophic 1997: reduced commercial mortgage lending, some forced sales of FINSAC-held property into a thin market, falling values in segments exposed to the financial sector’s difficulties. If the stress is not effectively managed — if the cascade of institutional failures becomes uncontrolled — the property market will face something closer to the full FINSAC scenario: near-total absence of commercial mortgage finance, massive forced property disposals, and the kind of value destruction that takes years to reverse.
The building has reached its peak. The structural vulnerabilities that were always there — that are always there, in markets built on borrowed money and rising prices and the confidence of people who have only seen an up-cycle — are beginning to express themselves. The crack is still narrow. But it is widening. And this column, in mid-1996, is watching it with the specific and focused attention that cracks in structures that carry important loads deserve.
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