FINSAC’s First Winter: Jamaica’s Housing Market Faces the Opening of the Financial Crisis, January 1998

Jamaica Homes Housing Affordability & Cost of Living Review — January 1998

• FINSAC was established in late 1996 and is now in its first full year of active operation; the extent of the domestic financial sector crisis is becoming clearer month by month
• Commercial mortgage rates are rising sharply as financial institutions in distress price risk into their lending; the accessible commercial mortgage market is contracting rapidly
• The Asian financial crisis erupted in July 1997 and is spreading; global risk appetite has reduced and emerging market financing conditions have tightened
• NHT’s contributor-funded model is proving its resilience; the Trust continues to originate below-market rate mortgages while commercial alternatives are shutting down
• Patterson’s PNP won its third consecutive general election on March 18, 1997; the new term’s economic agenda is dominated by the FINSAC crisis from the outset
• Building material costs are rising in Jamaican dollar terms as currency depreciation accelerates through the crisis period; construction affordability is deteriorating

January 1998 opens a year that will prove to be one of the most consequential in Jamaica’s financial history. The FINSAC financial crisis — which began to manifest visibly through 1996 as domestic financial institutions started to experience distress — has been in active rescue mode since the establishment of the Financial Sector Adjustment Company. The full scope of the crisis is now becoming apparent to the public, to policy-makers and to the households whose financial lives are affected by it. The domestic banking and building society sector that served Jamaica through the economic expansion of the late 1980s and early 1990s is being fundamentally restructured.

For the housing market, the consequences of this restructuring are already significant and will worsen through 1998. The building societies — institutions that collected household deposits and deployed them as affordable mortgage loans — were among the most direct casualties of the crisis. Their expansion in the early 1990s, fuelled by connected lending and assumptions about growth that proved unsustainable, left them exposed when economic conditions tightened. Their failure or distress has removed the primary formal housing finance mechanism for working and middle-income Jamaicans just as demand for affordable housing was at its highest.

Patterson’s Third Term and the FINSAC Inheritance

Prime Minister Patterson’s PNP won its third consecutive general election on March 18, 1997, securing a further mandate that was expected to continue the economic management of the 1990s expansion. What the incoming term has inherited instead is a financial sector crisis of historic proportions. The government’s FINSAC programme — guaranteeing depositor funds, rescuing failed institutions, managing the workout of bad assets — is the dominant economic challenge of the new term. The fiscal cost of FINSAC is crowding out the public investment in housing and infrastructure that would normally be the signature of a government with electoral capital to spend.

The IMF is engaged in Jamaica’s stabilisation efforts; the structural adjustment programme that accompanies this engagement requires fiscal consolidation measures that are painful for the population. The combination of FINSAC’s direct costs and the IMF programme’s fiscal discipline requirements leaves the government with limited capacity for proactive housing investment in January 1998.

What This Means

For aspiring homeowners, January 1998’s most important insight is the growing gap between NHT and commercial mortgage access. NHT’s contributor-funded model has protected the Trust from the dynamics destroying the commercial sector; NHT mortgages remain accessible at below-market rates to eligible contributors. Families who have been deferring NHT engagement — perhaps expecting to access commercial mortgages — should recalibrate toward the Trust as the primary formal housing finance route. For the construction sector, the crisis is reducing demand for new housing and tightening developer credit simultaneously; firms in the sector need to manage working capital carefully and reduce exposure to speculative development.

The Outlook: 1998 Will Define the Crisis

Jamaica’s housing market enters 1998 at the beginning of what will prove to be the most acute phase of the FINSAC crisis. The full impact of the financial sector restructuring on mortgage availability and construction activity will deepen through the year. Interest rates will continue to rise as government fiscal needs and institutional distress drive them upward. The Asian crisis will continue to limit Jamaica’s external financing options. For Jamaican families whose housing aspirations extend into this environment, patience, NHT engagement, and careful financial management are the tools available. The recovery — distant as it appears in January 1998 — will come; the preparation done now will determine who is ready to benefit from it.

This review is produced for informational and journalistic purposes only and does not constitute financial, legal or investment advice.

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