Asian Crash, Dow Drop, Jamaica Watches: October’s Global Market Panic and the Property Outlook — November 1997

Publication Date: October 3, 1997 | Coverage Period: September 3–October 2, 1997 | Category: Monthly Review

Month in Brief

• The Asian financial crisis entered a new and more dangerous phase in September: general market turmoil spread beyond the smaller Southeast Asian economies, with Hong Kong’s Hang Seng Index experiencing mounting volatility and the currency peg to the US dollar coming under speculative attack for the first time.
• Wall Street has not been immune: US equity markets showed significant volatility in September, with investors increasingly alert to the possibility that Asian economic weakness could dampen global growth and corporate earnings. A major sell-off on a single trading day — still in prospect as we write, with markets closing our coverage period under strain — could be imminent.
• Jamaica’s Bank of Jamaica maintained its extraordinary interest rate posture throughout September; no signal of imminent rate reduction was offered; the FINSAC workout continues to dominate the domestic financial policy agenda.
• Bauxite and alumina prices have come under downward pressure as forecasts for Asian industrial demand are revised sharply lower; this is a real and immediate threat to Jamaica’s foreign exchange earnings.
• The residential property market in Jamaica remained frozen in September: transaction volumes depressed, commercial mortgage activity negligible, and NHT-backed transactions the only meaningful source of activity.
• Construction starts in the private sector remained at a minimal level; government social housing delivery through NHT-funded schemes continued to provide the bulk of new residential supply.

Housing Market

September 1997 offered no respite for Jamaica’s residential property sector. The structural conditions that have defined the market throughout the FINSAC period — unaffordable commercial rates, limited NHT access, suppressed transaction volumes — remained firmly in place. The international backdrop, if anything, worsened: the mounting turmoil in Asian financial markets through September has injected new uncertainty into an investment environment that needed none.

Kingston’s upper and middle-market residential areas saw the pattern that has become familiar: properties listed at aspirational prices by vendors who cannot afford to sell at true market-clearing levels, and buyers unwilling or unable to access finance at any commercially viable rate. The few transactions that are occurring tend to be negotiated between parties with a pre-existing relationship — family members, business associates — where the price discovery process is less adversarial than in an arm’s-length market would require.

In the outer parishes, the picture is dominated almost entirely by NHT activity. St Catherine, which hosts a significant portion of Jamaica’s social housing delivery infrastructure, saw continued progress on NHT scheme completions. The numbers of families receiving keys to new units, while modest in relation to total housing need, represent real achievement in extraordinarily difficult conditions.

Government Policy and the NHT

The Patterson administration’s housing policy in the September period continued along established lines. The NHT remains the instrument of first and last resort for the government’s housing commitments. Government ministers have continued to reference the NHT’s concessionary loan programme in public communications, though the gap between the policy rhetoric of housing ambition and the practical reality of what the NHT’s loan limits can deliver is increasingly difficult to bridge in public discourse.

The FINSAC resolution process is now firmly embedded in a medium-term timeline. The institutions taken over by FINSAC — including Eagle Commercial Bank, Century National Bank, Calvert Finance and Merchant Bank and others — are being managed through a workout process that involves asset recovery, loan resolution and, where possible, restructuring of viable client relationships. This is unglamorous, slow work; it is also the indispensable prerequisite for any eventual normalisation of Jamaica’s financial system and, with it, its mortgage market.

Construction Sector

The construction sector in September reported conditions that were marginally better than the mid-year nadir — but only marginally. The NHT social housing pipeline continues to provide some work for contractors. A small number of private commercial developments in the tourism sector — which has maintained some investment momentum, partly supported by foreign capital — have also provided employment for building trades. But the residential construction market for ordinary Jamaicans remains effectively at a standstill.

Building material prices in September continued to reflect the dual pressures of a weak Jamaican dollar and elevated global commodity prices. Steel and cement remain expensive relative to local purchasing capacity. Skilled trades wages — electricians, plumbers, carpenters — are, paradoxically, under downward pressure from the general shortage of work, even as the total cost of a construction project remains high due to material costs. This compression — expensive materials, cheaper labour — has not resolved the fundamental affordability problem; it has simply redistributed it.

Investment Climate: Markets on the Edge

The international investment story of September 1997 is one of accelerating anxiety. The Asian financial crisis, which began with Thailand’s baht devaluation in July and spread rapidly through Southeast Asia over the summer, has in September reached a new and more alarming phase: the contagion is now lapping at Hong Kong’s shores.

Hong Kong’s Hang Seng Index, which had held up relatively well through the summer months, has in September become increasingly volatile. Speculators have identified the Hong Kong dollar’s peg to the US dollar as a potential target — just as they identified the Thai baht’s peg in the months before its collapse. The Hong Kong Monetary Authority has signalled its determination to defend the peg, and has the foreign exchange reserves to make that signal credible; the HKMA’s reserves, substantially larger relative to the territory’s monetary base than the Bank of Thailand’s were, give it considerably greater capacity to resist. But the pressure is real, and the psychological significance of an attack on Hong Kong’s peg — the territory having only formally returned to Chinese sovereignty in July — is considerable.

Wall Street is watching. US equity markets in September showed a volatility profile that has unnerved investors who had grown accustomed to the extraordinary bull market conditions of recent years. The Dow Jones Industrial Average, which reached record levels in the summer, has given back some of those gains under the combined weight of Asian uncertainty and rising concern about global growth. The possibility of a sharper correction — which we treat here as a risk rather than a certainty, since our coverage closes on October 2 before any such event has occurred — is being discussed with increasing seriousness in financial market commentary.

For Jamaica, the most direct material impact of Asian turmoil is on commodity prices. Bauxite and alumina prices have weakened as industrial demand forecasts for Southeast Asia are revised sharply lower. Japan, still the world’s largest aluminium consumer, is beginning to show signs of economic stress as its own financial sector fragilities are exposed by the regional environment. A sustained decline in aluminium demand from Asia would reduce Jamaica’s foreign exchange earnings at a moment when those earnings are particularly needed to support the Bank of Jamaica’s exchange rate management effort.

Diaspora

Diaspora sentiment toward Jamaica property investment in September has been characterised by watchful caution. The combination of global market volatility — which affects the value of diaspora savings and investment portfolios held in overseas markets — and the continuing domestic difficulties in Jamaica has produced a mood of deferral. Those with firm plans are proceeding; those who were still at the consideration stage are, by and large, waiting.

There is, however, a subset of diaspora investors — typically those with US dollar savings and a long time horizon — who see the current Jamaican dollar weakness as an opportunity. With the J$ at J$36–38 per US dollar, the purchasing power of hard-currency savings in Jamaica is considerably greater than it was three or four years ago. For a diaspora investor purchasing land for eventual retirement use — a fifteen or twenty year horizon — the current moment may indeed represent an attractive entry point. This is not a dominant view in diaspora communities, but it is present.

Affordability

The affordability picture in October 1997 is unchanged in its fundamentals. Commercial rates remain at or above 35 per cent. NHT rates remain at zero to five per cent for qualifying contributors. The gap between NHT loan limits (J$1.2–1.5 million) and construction costs (J$2.5–3.5 million for a basic unit) remains unbridged. The Jamaican household on median income remains excluded from both the commercial market and, in practice, from the NHT-only market, since the NHT loan alone is insufficient.

One dimension of the affordability crisis that deserves more attention is the housing deficit it is creating. Each month that the market remains frozen, the stock of housing that should have been built — but has not been — represents a deficit that will be extremely difficult to recover. Jamaica’s population is growing; its housing stock is not keeping pace. The recovery, when it comes, will inherit not just a frozen market but a structurally undersupplied one.

Looking Ahead

The month ahead — October 1997 — presents risks of the highest order on multiple fronts. Hong Kong’s currency peg is under attack; Wall Street is volatile; Asian economies are contracting; Jamaica’s own FINSAC workout has no clear near-term exit. The property investor — whether domestic or diaspora — faces a risk environment that counsels patience above all.

Our November edition will assess what October has brought. If Hong Kong’s peg holds, that will be a significant stabilising signal. If it does not — or if Wall Street experiences the sharp correction that some analysts are beginning to anticipate — the conditions facing Jamaica’s property sector will be materially worsened. We will report fully and without equivocation on whatever transpires.