The Ground Opens Up: Jamaica’s Property Market at Mid-1998 and the Financial Crisis That Is Swallowing Everything

There is a particular kind of structural failure that engineers call progressive collapse. It begins with the failure of one element — a single beam, a single column, a single load-bearing wall — that transfers its load to adjacent elements not designed to carry it. Those elements, now overloaded, begin to fail in turn. Their load transfers to the next element, and the next. What began as a local failure becomes a cascading one, and the cascade continues until it reaches an element strong enough to arrest it, or until there is nothing left to arrest. Jamaica’s financial sector, in the summer of 1998, is in the middle of exactly this kind of progressive collapse. The first failures — the merchant banks, the smaller building societies, Century National Bank — transferred their loads to the larger institutions and, ultimately, to the government. The government has been absorbing those loads through FINSAC. And the question that hangs over mid-1998 with the weight of dread is whether the government itself can bear the load that the financial sector’s collapse is transferring to it, or whether the collapse will continue past even that point.

The year 1998 finds Jamaica’s property market in freefall. Not the gradual decline that has characterised the market since 1996, when the first FINSAC-related institutional failures began to suppress demand and release distressed property onto a market that was ill-equipped to absorb it. Freefall: the accelerating downward trajectory of a market that has lost not merely its buyers and its confidence, but the institutional infrastructure — the lenders, the insurers, the investors — on which its functioning depended. A property market without a mortgage market is not merely a slow market. It is, in the most meaningful sense, not a market at all.

Reviewing 1997: The Warning That Was Not Heeded

In retrospect, 1997 was the year when Jamaica’s financial crisis moved from a problem that could be managed to one that had to be survived. The signals had been present since 1996: the Jamaica Stock Exchange, which had reached extraordinary valuations in the heady days of the mid-1990s bull market, had begun a correction that would eventually erase the majority of its gains. Century National Bank, one of the institutions whose rapid expansion in the early 1990s had epitomised the era’s financial exuberance, had collapsed. Smaller merchant banks and financial conglomerates were showing the signs of distress that always accompany overleveraged loan books when asset prices begin to fall.

The government’s response — the creation of FINSAC in January 1997, the passage of the Financial Institutions Act that gave regulators enhanced powers, the beginning of the bond issuance programme that would fund the rescue — was a recognition that the problems were systemic rather than idiosyncratic. A single institution’s failure can be resolved by closing it, paying out depositors from a deposit insurance fund, and moving on. Multiple simultaneous failures across interconnected institutions require a different response: a comprehensive restructuring mechanism with government backing and sufficient fiscal resources to restore confidence in the system as a whole.

For Jamaica’s property market, 1997 was the year in which the deterioration moved from the financial sector into the real economy in ways that were visible in transaction volumes and in the emerging difficulty of completing property deals. The commercial mortgage market was contracting rapidly as institutions under regulatory pressure reduced new lending. Developers who had relied on financial sector lending to fund construction were finding their credit lines cancelled or not renewed. Properties that had been purchased with borrowings from institutions that were now under FINSAC’s management were at risk of enforcement action as the new managers attempted to reduce loan books and generate liquidity.

The Jamaica Stock Exchange collapse deserves particular mention for its property market implications. The extraordinary valuations that Jamaican equities had achieved through 1995-1996 had created, for investors who held them, a paper wealth effect that supported spending and investment confidence. When the JSE corrected — losing a substantial proportion of its market capitalisation as the financial sector stocks that had been its heavyweights collapsed — that paper wealth evaporated with effects that rippled through consumer confidence, investment appetite, and ultimately property demand. The investors whose equity portfolios had been funding the confidence behind their property ambitions found themselves holding assets worth far less than they had assumed, in portfolios often concentrated in the same financial sector stocks that FINSAC was now restructuring.

The Property Market in 1998: Anatomy of a Suppressed Market

By mid-1998, Jamaica’s property market has the characteristics of a market that is functioning in bureaucratic form while failing in economic substance. Properties are listed. Agents are working. The Registrar of Titles is open for business. The NHT is processing applications. But the volume of genuine transactions — agreements of sale that lead to completions, completions that result in registered title transfers, title transfers that reflect actual money changing hands at prices that both parties freely agreed — has fallen to a fraction of what it was at the mid-1990s peak.

The mechanism of suppression operates differently at different price points. At the affordable end — the new housing schemes in St Catherine, the NHT-supported developments in greater Kingston — the constraint is primarily the NHT’s capacity to lend and the income levels of qualifying contributors. The NHT is continuing to function as the market’s primary lender, and its subsidised rates provide genuinely meaningful affordability support. But even the NHT’s portfolio is showing signs of stress as contributors whose incomes have been reduced by the economic deterioration find their loan payments difficult to maintain.

At the upper residential end — the properties in Cherry Gardens, Norbrook, Barbican, and the north coast resort markets — the constraint is the near-total absence of commercial mortgage finance at any rate that a functioning property market could work with. Upper-market properties in Kingston typically transacted through a combination of building society mortgages and insurance company lending in the healthy market of the mid-1990s. Both sources have now effectively disappeared: the building societies are retrenching, and the insurance companies are managing the consequences of their exposure to the institutions that FINSAC is restructuring. Cash buyers — a small population at the best of times — are the primary active purchasers in the upper market, and they are applying cash buyer discipline: waiting, watching, and offering prices that reflect the distress of the market rather than the aspirations of sellers.

FINSAC and the Distressed Property Pipeline

FINSAC’s emergence as one of the largest property holders in Jamaica — a role it acquired involuntarily through the foreclosure of collateral on the non-performing loans of the institutions it restructured — has created a dynamic in the property market that operates entirely outside the normal mechanisms of price discovery. FINSAC is not a property investor motivated by long-term return maximisation. It is a government agency motivated by loss minimisation and the management of a portfolio that it acquired as a by-product of a financial system rescue. Its disposition strategy for the properties it holds is shaped by these objectives, which are quite different from those of a normal market seller.

The properties in FINSAC’s portfolio span the full range of asset classes: commercial buildings in Kingston’s business district, residential properties ranging from modest homes to upper-market villas, development land in the resort corridors, agricultural land in the rural parishes. Managing this portfolio — maintaining properties that cannot be immediately sold, conducting valuations, managing tenant relationships where the properties are occupied, conducting disposal processes that generate fair value for the taxpayer who is ultimately bearing the cost of the rescue — requires resources and expertise that FINSAC is simultaneously building from scratch.

The disposals that FINSAC has completed in 1997-1998 have, as noted, established distress-level comparables in the segments where it has sold. This is not FINSAC’s fault — it is an arithmetic consequence of trying to sell properties into a thin market while other market participants are simultaneously retrenching. But the consequence for private sellers in those segments is that the FINSAC sale prices have become the new market reference points, making it extremely difficult to achieve prices that reflect what private sellers believe their properties are worth. The market has, in the most direct sense, been reset to lower levels by the forced selling of the FINSAC portfolio.

Looking Ahead to 1999: The Bottom Is Not Yet In

The forecast for 1999 is one of continued deterioration before the eventual stabilisation. The FINSAC process is not complete. The full scope of the financial sector’s distressed assets is still being revealed as institutions are restructured and their loan books examined. The fiscal implications of the rescue are still being calculated, and the bond issuance programme required to fund it will continue to keep domestic interest rates at levels that make commercial mortgage lending essentially irrelevant to the mass market.

Property values, in real terms, will continue to fall in 1999. The combination of FINSAC distress sales providing low comparables, commercial mortgage finance effectively unavailable, household incomes under pressure from the recessionary effects of the crisis, and consumer confidence at multi-decade lows creates an environment in which the equilibrating forces that normally arrest a property market decline — opportunistic buying, demand from first-time buyers, institutional investment — are simply not available to perform their function.

The progressive collapse is not over. But it is, by 1998-1999, reaching the elements that are strong enough to arrest it: the NHT, which will not stop lending; the Victoria Mutual and Jamaica National building societies, which have managed the crisis with sufficient capital discipline to remain functional; the government’s fiscal commitment to seeing the FINSAC process through to completion rather than allowing the financial sector to fail entirely. These are strong elements. They will hold. And when the cascade has been arrested — when the weight of the failure has been distributed across elements that can bear it — the slow, expensive, indispensable work of rebuilding can begin.

Not yet. But that moment is coming. And anyone who understands what has been lost here, and why, will not make the same mistakes when the next building goes up on this ground.