Asian Crisis Deepens and Suharto Falls: Jamaica’s Housing Credit Paralysis Holds Firm — May 1998

Publication Date: 3 May 1998 | Coverage Period: 3 April–2 May 1998 | Category: Monthly Review

Month in Brief

• The Asian financial crisis intensified through April, with Indonesia the focal point of instability: street protests swept Jakarta and other major cities amid widespread economic distress, setting the stage for the political upheaval that would culminate in President Suharto’s resignation the following month.
• Global commodity prices remained depressed, with bauxite and alumina — Jamaica’s principal merchandise export earners — continuing to trade at levels well below those that prevailed before the Asian crisis began in mid-1997.
• Jamaica’s exchange rate against the US dollar continued its gradual depreciation in April, maintaining pressure on the cost of imported construction materials including steel, cement clinker, and fixtures; the rate hovered in the J$36–40 per US dollar range.
• The Bank of Jamaica maintained its elevated rate structure through April; Treasury bill yields remained in the 22–26 per cent range, with commercial mortgage rates locked between 28 and 35 per cent and formal residential lending activity essentially absent outside the NHT.
• FINSAC continued to manage its accumulated portfolio of distressed financial-sector assets without producing the large-scale property disposals that the market had been anticipating; the shadow inventory effect on pricing persisted.
• Pre-World Cup national excitement began to build as Jamaica’s qualifying campaign concluded and preparations for the June tournament in France gathered pace, providing a cultural counterpoint to the economic gloom.

Housing Market Overview

Jamaica’s residential property market in April and early May 1998 continued to exhibit the characteristics of a market in deep structural suspension. The mechanisms that normally connect buyers to sellers — mortgage finance, developer activity, estate agency commissions — are operating at minimum levels, and the transactions that do occur are largely invisible in conventional market statistics because they bypass the formal financial system entirely.

The Kingston metropolitan area presents different pictures in different segments. In the premium residential suburbs — Cherry Gardens, Norbrook, Barbican, and the upper reaches of Stony Hill — the market is characterised by thin activity, extended marketing periods, and occasional motivated-seller transactions at prices that reflect the absence of competitive bidding. In the middle-income suburbs — Duhaney Park, Havendale, Constant Spring — the market has, for practical purposes, stalled: there are listed properties and there are aspirant buyers, but the financing gap between them is unbridgeable at current commercial rates. In the affordable segment — Portmore’s various communities, Waterford, Bridgeport — activity is almost entirely confined to NHT-financed transactions and informal owner-construction funded by remittances and personal savings.

The rural parish markets present a somewhat different picture. In St. Elizabeth, Manchester, Trelawny, and other rural parishes, the primary form of residential activity remains informal self-build: families acquire land in stages, often inheriting or purchasing unregistered parcels, and construct or improve homes incrementally as remittance income and personal savings permit. This market is entirely outside the formal property finance system and is essentially unaffected by BOJ rate policy — it responds to different inputs, principally the flows of diaspora remittances and the availability of local construction labour.

Government Policy and FINSAC

The Patterson administration’s April policy management was dominated by the challenge of maintaining macro stability in an increasingly turbulent external environment. The Indonesian crisis — which was threatening, even before Suharto’s eventual resignation, to produce a political and economic collapse of significant scale — added to the already-considerable pressures on global risk appetite. Jamaica, as a small emerging market with a significant current account deficit and high external debt, is sensitive to the global investor mood in ways that larger, more diversified economies are not.

On the domestic policy front, the dominant story remained FINSAC and its slow-motion resolution. The organisation continued to manage a portfolio of financial assets — primarily real estate — from the collapsed banking sector. FINSAC’s governance structure, which sits within the government’s financial sector oversight framework, has been increasingly scrutinised by parliamentary committees and independent commentators who question both the pace of disposal and the transparency of the process.

One area of government policy that has attracted positive comment is the NHT’s performance as a housing finance institution in circumstances that would have tested a less robustly structured entity. The NHT’s payroll-contribution model — mandatory contributions from employers and employees in the formal sector, recycled as mortgage finance at subsidised rates — has provided a resilient stream of housing finance that has continued to function throughout the banking crisis. The institution’s relative insulation from commercial interest rate dynamics has made it, paradoxically, more important during the crisis than it was during the relatively normal market conditions that preceded it.

Construction Sector

Private residential construction in April continued at the depressed levels that have characterised the sector since late 1997. Hardware retailers, cement distributors, and construction contractors all report volumes substantially below their mid-1990s peaks. The sharp contraction in private residential development has had downstream effects on employment in the construction trades — carpenters, masons, plumbers, electricians, and labourers whose livelihoods depend on an active building programme.

The imported cost of construction materials remains a significant constraint on the economics of new development. Steel reinforcing bars, cement clinker, roofing materials, window frames, and fittings are all priced in or linked to foreign currency, and the continued depreciation of the Jamaican dollar against the US dollar adds to their landed cost in Jamaican dollar terms. Developers who had been monitoring the market for signs of an opportunity to resume activity report that exchange rate depreciation is consistently pushing their break-even costs higher, making the economics of new development harder to justify even at distressed land prices.

The NHT’s development programme, concentrated in Portmore and selected parish centres, continued to represent the primary source of new residential units entering the market. The HAJ’s planning pipeline, while constrained by budget limitations, continues to add potential capacity, though the conversion of planning permissions to actual starts depends on NHT financing availability and contractor capacity.

Investment Perspective

The investment thesis for Jamaican real estate in April and May 1998 requires a clear-eyed assessment of the risks alongside the potential rewards. The bull case — that current distressed prices represent a generational buying opportunity for patient investors with access to hard currency — has analytical merit. The bear case — that the macro environment may continue to deteriorate, that exchange rate depreciation may erode the value of Jamaican-dollar-denominated assets for offshore investors, and that the FINSAC resolution process may take years longer than anticipated — also has analytical merit. The question is not which case is correct in the long run; it is which unfolds on a timeframe that is relevant to the investor’s capital deployment horizon.

The most sophisticated investors active in the Jamaican market in the current period are those who have identified specific assets — parcels of prime land, partially completed developments, well-located commercial properties with residential conversion potential — where they have a specific view on value and a specific plan for realisation. Generic exposure to the Jamaican property market is not a coherent strategy in the current environment; asset-specific, opportunity-driven investment, with realistic exit assumptions, is.

Diaspora and Remittance Dynamics

April and early May have seen sustained remittance flows from the Jamaican diaspora, reflecting the continued dependence of many Jamaican households on overseas income. The World Cup qualification — achieved in late 1997 — has given the diaspora communities of the United States, United Kingdom, and Canada a shared focal point for national pride and community cohesion as the June tournament approaches. Property agents with diaspora clientele report that conversations about Jamaica’s property market have become easier since the qualification — the tournament provides a natural conversation opener that frequently leads to discussions about investment and return.

The diaspora’s approach to property investment in the current environment has become more patient and more selective. The experiences of diaspora investors who purchased during the boom of 1992–95 and who now hold properties worth a fraction of what they paid — in Jamaican dollar terms, let alone US dollar terms — have served as cautionary examples. The current generation of diaspora investors is generally seeking either very specific value opportunities or waiting for clearer signs of stabilisation before committing capital.

Affordability Analysis

The May 1998 affordability picture is structurally identical to that which has prevailed since the banking crisis intensified in late 1997. Commercial mortgage rates of 28 to 35 per cent make formal-sector purchase financing impossible for the vast majority of Jamaican households. The NHT’s subsidised rates of zero to five per cent make purchase accessible for qualifying members on properties within NHT’s loan limits, but the supply of NHT-financed units is constrained by both the NHT’s lending capacity and the availability of appropriately priced properties within NHT’s approved schemes.

For households that are NHT contributors but whose property aspirations exceed what NHT alone can finance — a large and frustrated cohort in the lower-middle and middle segments of the market — the options are limited and unpalatable. They can wait, in the hope that commercial rates fall or that NHT limits are raised; they can purchase a less-desired property within NHT limits; or they can continue to rent and accumulate savings, in the hope that the market eventually comes to them. None of these options is satisfying, and the cumulative frustration of this cohort represents a latent demand that will, in a normalised rate environment, produce a significant surge in market activity.

Looking Ahead

The second quarter of 1998 is drawing to a close with Jamaica’s property market still locked in the conditions that have defined it since the banking crisis began. The World Cup approaching in June offers a moment of national celebration and international profile-raising that is genuinely valuable for Jamaica’s long-term attractiveness as an investment destination. The underlying macro conditions — high interest rates, FINSAC uncertainty, a vulnerable exchange rate, falling commodity prices — remain the primary determinants of the market’s near-term trajectory.

The Patterson administration’s ability to navigate these conditions without a major external shock will determine whether the second half of 1998 brings the first signs of stabilisation or a further deterioration. The Asian crisis is the most important external variable: its resolution, when it comes, will allow commodity prices to recover, global risk appetite to improve, and Jamaica’s access to external financing to ease. The timing of that resolution remains deeply uncertain. For Jamaica’s property market, patience and selectivity remain the cardinal investment virtues.