35% Rates and the NHT: How Jamaica’s Financial Crisis Made the NHT the Only Game in Town — August 1997

Publication Date: August 3, 1997 | Coverage Period: July 3–August 2, 1997 | Category: Monthly Review

Month in Brief

• The Asian financial crisis, which this publication flagged as a breaking development in last month’s edition following the Thai baht’s devaluation on July 2, has accelerated alarmingly through July: the baht has now lost approximately 20–25 per cent of its pre-crisis value, and currency pressure has spread to Indonesia, Malaysia and the Philippines.
• Malaysia’s ringgit and Indonesia’s rupiah have both come under sustained attack in July; regional central banks have intervened to support their currencies, but reserves are being tested. The contagion dynamic feared by economists appears to be materialising.
• The Bank of Jamaica is monitoring Southeast Asian developments with, by all available indications, considerable anxiety; the parallels with Jamaica’s own FINSAC predicament — exchange rate pressure, depleted financial sector capacity, capital flight — are too close for comfort.
• Jamaica’s commercial mortgage market remains functionally inoperative for ordinary borrowers, with lending rates in the 35–40 per cent range at institutions still in a position to lend at all.
• The National Housing Trust disbursed further tranches to qualifying contributors during the July period, but the gap between NHT loan ceilings and actual construction costs continues to frustrate would-be owner-builders.
• Construction sector activity remains suppressed; material imports are expensive at the prevailing exchange rate of approximately J$35–37 per US dollar, and skilled labour pipelines remain thin.

Housing Market

July 1997 has brought no relief to Jamaica’s residential property market, and the international backdrop — rapidly deteriorating — has done nothing to encourage the confidence that a market recovery would require. The month opened in the immediate aftermath of the Thai baht’s devaluation, an event whose implications are already being felt across financial markets from Seoul to Kuala Lumpur, and it closes with the contagion spreading faster than most regional analysts anticipated.

In this environment, any aspiration toward a resumption of normal commercial mortgage lending is necessarily deferred. The Bank of Jamaica’s rates — which we now estimate at approaching 30–35 per cent on an annualised basis, with commercial lenders adding their own margins to produce effective mortgage rates at or above 35–40 per cent — make the arithmetic of property finance impossible for the vast majority of Jamaican households. A property priced at J$2 million, financed at 38 per cent over twenty years, would require monthly debt service of a magnitude that exceeds the gross monthly income of all but the most senior professional households.

The practical consequence is that the Jamaica Homes market — such as it is — has bifurcated into two largely separate worlds: an NHT world, where qualifying contributors can access meaningful finance at concessionary rates; and a cash world, where a small number of equity buyers — remittance recipients, returning residents, institutional vendors — are the only active participants. The stretch between those two worlds is currently unbridged.

Government Policy and the NHT

The National Housing Trust has become, through force of circumstance as much as design, the defining institution of Jamaica’s housing economy in the FINSAC era. Its continued disbursement of loans at rates between zero and five per cent — against a commercial market operating at seven to eight times those rates — represents a subsidy of extraordinary magnitude to those contributors fortunate enough to qualify and access the system.

The NHT’s loan limits of approximately J$1.2 to J$1.5 million are, however, increasingly inadequate relative to what it costs to build or buy. A basic two-bedroom unit in a suburban Kingston parish — St Catherine, St Andrew’s outer reaches — now requires total investment approaching J$2.5 to J$3.5 million when land, materials and labour are aggregated at current prices. The NHT contribution covers perhaps 40–60 per cent of that total. The balance must come from savings, family support or, rarely, a commercial top-up loan at rates that negate most of the NHT benefit.

Government policy signals in July have centred on the continuing management of the FINSAC workout: the administration of institutions under FINSAC supervision, the protection of depositors where possible, and the broader effort to prevent the financial crisis from triggering a sovereign debt crisis. Housing policy is, in this environment, essentially hostage to macro-financial stabilisation. The two cannot be separated.

Construction Sector

The construction sector’s travails in July can be summarised in a single observation: the inputs are expensive, the clients are absent, and the finance is unaffordable. Building materials — particularly those with significant import content, which is most of them — are priced at levels that reflect both the weakened Jamaican dollar and the global commodity price environment. Cement, steel, roofing, electrical and plumbing materials all carry input costs that, when combined with current land prices and professional fees, push total construction costs well beyond what NHT loans can fully fund and commercial loans cannot fund at all.

Developers who are active at this moment are doing so predominantly through government-backed social housing schemes or through their own equity, often sourced from pre-sales to diaspora buyers. The private commercial developer model — which relies on construction finance from a bank and sales to mortgage-backed buyers — is, for practical purposes, suspended indefinitely.

Investment Climate: The Asian Alarm

The investment story of July 1997 is, above all else, the Asian financial crisis and its gathering momentum. What began — as we noted in our July 3 edition — as the Thai baht’s devaluation on July 2 has within a single month revealed itself to be something considerably larger. The contagion has moved through Southeast Asia with remarkable speed.

The Malaysian ringgit has fallen sharply against the US dollar throughout July. The Indonesian rupiah has weakened materially, and the Philippine peso has been under sustained pressure. Regional central banks have spent foreign exchange reserves at an alarming rate attempting to hold their pegs; in most cases, the markets are winning. Prime Minister Mahathir Mohamad of Malaysia has publicly accused foreign currency speculators — identifying figures such as George Soros by name — of deliberately attacking regional currencies. Whatever the merit of that characterisation, it reflects the speed with which a regional economic crisis has become a political one.

For Jamaica, the implications of this international turmoil are multiple. First, and most directly: bauxite and alumina — Jamaica’s principal export earners — are commodities whose prices and demand are affected by the health of Asian industrial economies. A sustained slowdown in Southeast Asia’s growth rates, which the currency crises are now virtually certain to produce, will reduce demand for aluminium and thus for the Jamaican inputs that feed global production chains. This is not an immediate catastrophe but it is a medium-term pressure on Jamaica’s foreign exchange earnings at precisely the moment those earnings need to be strong.

Second, and more systemic: the Asian crisis demonstrates, with painful clarity, the destructive potential of currency and financial sector crises in emerging markets. Jamaica has been living through its own version of such a crisis for the better part of two years. The difference is that Jamaica’s crisis was primarily domestically generated — the collapse of local financial institutions — rather than driven initially by external capital flows. But the dynamics of contagion — confidence loss, capital flight, currency pressure, forced rate rises, economic contraction — are recognisably the same. The Bank of Jamaica is watching Southeast Asia and seeing, with uncomfortable familiarity, a mirror of its own predicament at a different scale.

Diaspora

Jamaican diaspora communities in the United Kingdom, the United States and Canada are following both the Asian crisis and the domestic FINSAC situation with understandable concern. For those who have been contemplating property investment in Jamaica — either as a retirement plan, an investment vehicle or a family obligation — the current moment presents a complicated calculus.

On the one hand, the weakness of the Jamaican dollar against sterling and the US dollar means that diaspora purchasing power, in Jamaica terms, is nominally enhanced. A house priced at J$3 million requires approximately GBP 50,000 or USD 83,000 at current rates — sums that are meaningful but not beyond the reach of a diaspora family that has spent a decade accumulating savings in a harder currency. On the other hand, the risks are real: exchange rate uncertainty, the difficulty of managing a property remotely, and the broader economic fragility that makes Jamaica’s recovery timeline uncertain.

The most common diaspora strategy we observe is phased: an initial land purchase or partial construction, supplemented by remittances over several years, aiming at completion when the family member intends to return. This model sidesteps the commercial mortgage market entirely, which is wise given current conditions.

Affordability

The affordability picture in August 1997 requires little elaboration beyond the numbers. Commercial mortgage rates: 35–40 per cent. NHT rates: zero to five per cent. Median formal sector household income: approximately J$8,000–12,000 per month. Entry-level property with land: J$2.5–3.5 million. Maximum NHT loan: J$1.2–1.5 million. Commercial loan top-up required: J$1–2 million. Monthly debt service on that top-up at 38 per cent: J$3,000–6,000 per month minimum. Conclusion: unserviceable by any ordinary household.

The NHT remains a lifeline, but a partial one. Without a dramatic reduction in commercial rates — which requires FINSAC resolution, which requires time — the affordability gap cannot be closed by any instrument currently available in the Jamaican policy toolkit.

Looking Ahead

The outlook for September must be assessed against two variables that are, as of this writing, deeply uncertain. The first is the trajectory of the Asian financial crisis: will contagion be contained, or will it spread further, reaching the larger Asian economies — South Korea, Japan, eventually China — that thus far appear to have been less directly affected? The second is the pace of Jamaica’s FINSAC workout: is there any near-term prospect of interest rate relief, or must the economy absorb another quarter or more of 30-plus per cent rates?

Neither question admits of an optimistic answer on present evidence. We will report developments as they arise. The Caribbean property investor who is watching and waiting for conditions to improve is, on current trajectories, likely to be waiting for some time yet. Patience, and the NHT, remain the instruments of choice.