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

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

Month in Brief

• Hong Kong’s Hang Seng Index crashed catastrophically on October 23, 1997 — within our coverage period — falling by more than 10 per cent in a single session and marking the most dramatic single-day fall in the territory’s stock market history to that point. The Hong Kong dollar peg to the US dollar held, but at enormous cost in overnight interest rates briefly spiking to triple-digit levels to repel speculative attack.
• The Wall Street shock followed four days later: on October 27, 1997, the Dow Jones Industrial Average fell 554 points — within our coverage window — triggering a trading halt (the first time circuit breakers were activated) and sending shockwaves through global equity markets. It was the largest single-day point fall in the Dow’s history at that time.
• The Asian financial crisis is now, demonstrably, a global financial crisis: markets from London to Toronto to São Paulo registered severe declines in sympathy with Hong Kong and New York. The consensus that emerging markets were a one-way bet for international capital has been emphatically, violently revised.
• Jamaica’s Bank of Jamaica maintained its crisis-level interest rates throughout October; the international turmoil of the month, far from providing any respite, has if anything strengthened the case for maintaining the defensive posture.
• Jamaica’s residential property market remained frozen in October, with commercial mortgage activity negligible; the events of October 23 and 27 have added an international dimension of anxiety to a domestic market already under severe pressure.
• Bauxite and alumina prices fell further in October as Asian demand forecasts were revised sharply lower following the Hang Seng crash; Jamaica’s foreign exchange earnings outlook has deteriorated.

Housing Market

October 1997 will be remembered — in this publication’s pages, at least — as the month that a regional financial crisis became a global one. The Hang Seng crash on October 23, and the Dow Jones Industrial Average’s extraordinary fall of 554 points on October 27, have changed the psychological landscape for property investors of all types, in all markets, in ways that will take some time fully to absorb.

For Jamaica’s residential property market, the immediate practical impact of the October global market events is modest — because the market was already at effectively zero activity by any commercial standard. You cannot freeze what is already frozen. But the psychological impact is real: investors who had been contemplating Jamaica property as a medium-term opportunity on the thesis that rates would normalise and the market would recover have been forced to reprice their assumptions about the global environment into which that recovery would have to occur.

Kingston’s residential property market in October saw continuation of the same thin, fragmented activity that has characterised the year. Upper St Andrew — Cherry Gardens, Norbrook, Barbican, Jacks Hill — reported a small number of transactions, all at prices representing significant discounts to vendor aspirations. The St Catherine social housing market, anchored by NHT scheme deliveries, continued to provide the only meaningful volume of completed residential transactions.

Government Policy and the NHT

The government’s housing policy response to the October international turmoil was, understandably, focused on macro-financial management rather than housing-specific initiatives. The Bank of Jamaica and the Ministry of Finance were consumed by the task of monitoring exchange rate pressure and ensuring that the defence of the Jamaican dollar remained credible against a backdrop of global capital flight from emerging markets.

The National Housing Trust continued its operations through October without disruption. The NHT’s structure — funded by employer and employee contributions rather than by market borrowing — gives it an operational insulation from financial market conditions that commercial lenders entirely lack. Whatever happens on Wall Street or the Hang Seng, the NHT will continue to receive its statutory contributions and disburse its statutory loans. This institutional resilience is, in the current environment, enormously important.

NHT loan limits remain at approximately J$1.2 to J$1.5 million; rates remain at zero to five per cent by contributor band. These parameters have not changed, and there is no indication they will change imminently. The gap between these limits and construction costs continues to be the defining constraint on NHT’s effectiveness as a vehicle for mass housing provision.

Construction Sector

The construction sector in October was affected by the prevailing mood of uncertainty in ways that go beyond the immediate affordability constraints. Developers who had been cautiously contemplating new project initiation — perhaps tentatively pricing out NHT-targeted schemes, or exploring joint venture structures with returning diaspora investors — have put those conversations on hold following the October market events. The risk premium attached to any new capital commitment has, across the board, risen sharply.

Building materials prices in October continued to reflect the J$ weakness, with the exchange rate now firmly above J$36 per US dollar. Cement and steel remain the dominant cost drivers for basic residential construction, and both have import components that are directly affected by the exchange rate. The structural mismatch between input costs denominated in hard currency and loan limits denominated in an increasingly weak Jamaican dollar is widening, not narrowing.

Investment Climate: October’s Two Black Days

The investment story of October 1997 demands extended treatment. Two dates in particular define the month: October 23 and October 27.

On October 23, Hong Kong’s Hang Seng Index fell by more than 10 per cent in a single trading session — the largest single-day fall in the index’s history at that point. The precipitating factor was renewed speculative pressure on the Hong Kong dollar’s peg to the US dollar. The Hong Kong Monetary Authority, rather than devalue, chose to defend the peg through the monetary mechanism: allowing overnight interest rates to spike to extraordinary levels — briefly reaching several hundred per cent on an annualised basis — to make it prohibitively expensive to borrow Hong Kong dollars to sell against the US dollar. The peg held. But the cost to Hong Kong’s equity market was severe: the Hang Seng lost roughly a third of its value in the months following its August peak.

The contagion reached New York four days later. On October 27, the Dow Jones Industrial Average fell 554 points — the largest single-day point decline in the index’s history. Circuit breakers were activated for the first time since their introduction following the 1987 crash; trading was briefly halted. The following day, the Dow recovered much of the ground lost. But the event — the imagery of suspended trading, of floor traders in evident distress, of screens showing numbers that had not been seen before — lodged in the memory of every investor and policymaker worldwide.

For Jamaica, the October events compound an already extremely difficult situation. The Bank of Jamaica, which has been conducting Jamaica’s own version of a currency defence — using high interest rates to make Jamaican dollar holdings attractive relative to US dollar flight — now faces a global environment in which emerging market assets of all kinds are being sold. The question is not only whether Jamaica’s specific fundamentals justify confidence, but whether international investors have the appetite for any emerging market risk at this moment. The evidence from October suggests they do not.

Bauxite and alumina prices fell further in October. The mechanism is direct: as Asian economies slow, industrial demand for aluminium falls; as demand for aluminium falls, demand for Jamaican bauxite and alumina — key feedstocks for global aluminium production — weakens. Jamaica’s foreign exchange earnings, already under pressure from the FINSAC crisis’s impact on investment and trade, are facing an additional commodity-price headwind that was not part of the calculus even three months ago.

Diaspora

For the Jamaican diaspora, October 1997 has been a month of two concerns: what is happening in the countries where they live and work — where their savings and pension funds are invested, where the equity markets on which their employers’ stock options depend have just experienced historic single-day falls — and what is happening in Jamaica, where they have family, property ambitions and emotional investment.

The practical consequence of October’s global market events for diaspora property buyers is a tightening of available capital. Those who were planning to deploy US dollar or sterling savings into Jamaican property may find those savings somewhat reduced in real terms following October’s volatility. This is particularly true for diaspora investors with significant exposure to US or UK equity markets, where October brought painful mark-to-market losses.

The longer-term diaspora investor — looking at a decade-plus horizon — is less affected by monthly market movements. For this cohort, the key question remains: is Jamaica on a credible path toward FINSAC resolution and economic normalisation? October’s events have not answered that question in either direction.

Affordability

Jamaica’s housing affordability crisis in November 1997 is unchanged in its structural dimensions and, if anything, slightly worsened by the currency movement of October. Commercial mortgage rates remain at or above 35 per cent. The Jamaican dollar has weakened further, pushing construction material costs higher. NHT loan limits remain at J$1.2–1.5 million. The gap between those limits and construction costs has, if anything, widened marginally over the past month.

The one structural advantage of the current moment — which is cold comfort to those who need housing now — is that the pent-up demand accumulating behind the affordability barrier is building. When rates eventually fall to levels that make commercial mortgages serviceable, the release of suppressed demand will be significant. But that release remains a prospect for another day.

Looking Ahead

The November and December period will be shaped by the aftermath of October’s global market shocks and by a developing domestic political context: Jamaica’s general election is approaching, and both the People’s National Party (PNP) under Prime Minister P.J. Patterson and the Jamaica Labour Party (JLP) under Edward Seaga will be making their cases to the electorate on the full range of issues, including housing and the management of the FINSAC crisis.

We will examine the parties’ housing platforms in our December edition, which will also carry the full context of the election campaign’s closing weeks. The property investor — domestic and diaspora — has a legitimate interest in which party governs Jamaica through the FINSAC recovery, and on what terms. We will provide the analysis needed to assess that question as clearly as the evidence permits.

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