Lewinsky Immunity, Asian Contagion, and the Stillness of Jamaica’s Mortgage Market — August 1998

Publication Date: 3 August 1998 | Coverage Period: 3 July–2 August 1998 | Category: Monthly Review

Month in Brief

• Monica Lewinsky reached an immunity agreement with Independent Counsel Kenneth Starr’s office on 28 July, virtually guaranteeing that the President of the United States will face detailed testimony about his conduct; the deal dominated international news cycles and rattled confidence in Washington’s political leadership at a delicate moment for global markets.
• The Asian financial crisis showed no signs of resolution: Indonesia’s rupiah remained under severe pressure, South Korea’s corporate restructuring programme produced further large-scale redundancies, and Thailand’s economic output continued to contract sharply.
• Commodity prices, critically important to Jamaica as a bauxite and alumina exporter, remained depressed; aluminium traded near multi-year lows on the London Metal Exchange as Asian industrial demand contracted.
• Jamaica’s Bank of Jamaica kept Treasury bill yields in the 22–26 per cent range, maintaining the high-rate regime imposed in response to FINSAC and exchange-rate pressures; commercial mortgage availability remained extremely restricted.
• FINSAC continued its management of distressed assets from failed financial institutions, with property disposals proceeding at a measured pace that market participants consider insufficient to restore price transparency.
• The National Housing Trust reported steady but constrained lending activity, remaining the dominant provider of formal mortgage finance in an environment where commercial lenders have effectively withdrawn.

Housing Market Overview

Jamaica’s residential property market in August 1998 presents a picture of deep, structural inactivity that is proving more durable than many observers anticipated at the start of the year. The expectation, widely held in late 1997, was that FINSAC’s resolution programme would create a clearing event — a defined moment at which distressed assets would be priced and absorbed by the market, after which a normalisation of credit conditions could begin. That clearing event has not occurred, and with each passing month the probability of a rapid resolution recedes.

Transaction volumes in the residential segment remain deeply depressed. Agents operating in the Kingston metropolitan area report that genuine arm’s-length sales — as opposed to transfers within families or forced disposals under legal process — are running at perhaps a quarter of the rate that prevailed in 1993 and 1994. The causes are well understood: commercial mortgage rates in the range of 28 to 35 per cent render formal financing economically impossible for most prospective purchasers, while the shadow inventory of FINSAC-controlled properties suppresses vendor confidence in any price they might set for a non-distressed property.

In the luxury market — Norbrook, Cherry Gardens, Barbican, and the better addresses of Portmore’s newer sections — vendors are reporting extended marketing periods and increasing willingness to negotiate. A property that in 1995 might have sold in eight to twelve weeks is today likely to sit on the market for six months or longer before attracting a credible offer. The buyers who do appear are almost invariably cash purchasers, frequently diaspora returnees or overseas Jamaicans acquiring properties as investment or for eventual retirement use.

Government Policy and FINSAC

The Patterson administration’s economic management in July 1998 was dominated by two interconnected imperatives: maintaining sufficient foreign exchange reserves to defend the Jamaican dollar against further depreciation, and managing the ongoing fiscal cost of the FINSAC intervention. The two objectives are in inherent tension: FINSAC’s operations require public expenditure and domestic debt issuance that increases the money supply and creates inflationary pressure, while exchange-rate defence requires tight monetary policy that suppresses growth and increases the real burden of debt on FINSAC’s property portfolios.

FINSAC’s property management challenge is substantial. The organisation holds receivership over numerous residential developments, commercial properties, and undeveloped land parcels acquired from failed institutions. The carrying costs — security, maintenance, property taxes, insurance — accumulate monthly. FINSAC’s preference for maximising recovery values is entirely rational given its mandate, but the combined effect of FINSAC’s reticence to sell and the commercial sector’s inability to finance purchases is a market that cannot clear.

Parliament’s Public Accounts Committee has been scrutinising FINSAC’s operations with increasing intensity, reflecting both the fiscal magnitude of the intervention and the political sensitivity of an institution whose actions have affected a large number of Jamaican depositors, shareholders, and property owners. The government has defended FINSAC’s pace of resolution as prudent, but the criticisms from the opposition Jamaica Labour Party and from independent economists have sufficient analytical foundation to sustain pressure for greater transparency.

Construction Sector

Private residential construction in Jamaica is operating at minimum viable levels. The pipeline of new schemes — those for which planning permission has been sought and financing arranged — has contracted to near-zero outside the NHT sector. Developers who were active in the early 1990s, building townhouse complexes in Washington Gardens, Duhaney Park, and the expanding communities of St. Catherine, report that they have exhausted their pre-crisis project pipelines and cannot finance new ventures at current commercial lending rates.

The construction materials sector is reflecting this reality. Cement sales, a useful proxy for construction activity, have declined significantly from their mid-1990s peak. Hardware retailers in Kingston and the major parish capitals report that trade customers — contractors and sub-contractors — are buying materials on shorter horizons, consistent with small-scale renovation and repair work rather than new-build activity. The formal construction employment data, while lagged, confirms a material reduction in the workforce engaged in residential construction.

The exception remains government and NHT-sponsored schemes. The Housing Agency of Jamaica continues to bring forward sites in Portmore and in rural parish centres, and the NHT’s direct construction programme — as distinct from its mortgage lending activities — provides some counterweight to private-sector contraction. These schemes are typically targeted at lower-income purchasers and are priced to be accessible under the NHT’s subsidised lending programme, ensuring that they do not depend on the commercial mortgage market for offtake.

Investment Perspective

The investment calculus for Jamaican real estate in July and August 1998 is dominated by the opportunity cost of capital. With BOJ Treasury bills yielding 22 to 26 per cent in nominal terms, the return required to justify illiquid real-estate investment — incorporating illiquidity premium, management costs, and exchange-rate risk — is extremely high. For a domestically denominated investor, near-risk-free government paper at 24 per cent is a formidable competitor to property assets whose nominal appreciation cannot be reliably forecast in the current environment.

For the offshore or US-dollar investor, the calculus is somewhat different. Property acquired in Jamaican dollars at current depressed prices offers a potential double benefit if and when the macro environment normalises: capital appreciation in Jamaican dollar terms combined with any recovery in the exchange rate against the US dollar. The caveat, which cannot be overstated, is that this upside scenario requires a macro stabilisation that remains some years away by any plausible projection.

The pre-Russia anxiety that characterised global markets in July — widespread awareness that Russia’s fiscal position was deteriorating rapidly and that a sovereign debt event was becoming increasingly likely — added a layer of caution to investor sentiment that affected all emerging-market assets. Jamaica was not immune to this contagion effect, even though the direct economic linkage between Jamaica and Russia is negligible. The transmission mechanism is through global risk appetite: when investors sell emerging-market assets broadly, Jamaica’s access to international capital markets tightens.

Diaspora and Remittance Dynamics

Remittances from the Jamaican diaspora continued to provide essential support to household incomes and, indirectly, to the residential property market through the July coverage period. The United States remains the primary source, with the New York, Miami, Hartford, and Atlanta communities collectively accounting for the largest share of inflows. The United Kingdom and Canada follow, with the Toronto and London communities particularly active.

The pattern of diaspora property activity visible in mid-1998 differs qualitatively from that of the late 1980s and early 1990s. Earlier generations of diaspora investors tended to purchase or build homes for their own eventual return. The current generation — younger, more likely to have UK or US citizenship, and with more complex family ties in both jurisdictions — is making more varied decisions. Some are purchasing investment properties with rental income in mind; others are buying land and holding it pending future construction; others are remitting for the informal construction or improvement of family homes that do not enter any formal transaction record.

Affordability Analysis

The fundamental affordability problem in Jamaica’s housing market in August 1998 is not principally a problem of property prices: it is a problem of interest rates. Were commercial mortgage rates to fall to 12 or 15 per cent — still high by OECD standards but plausible in a post-stabilisation Jamaican environment — the arithmetic of home purchase would change dramatically for middle-income households. At current rates of 28 to 35 per cent, it does not matter whether property prices fall by 10 or even 20 per cent: the monthly debt service remains unaffordable for any household without substantial equity or a dual professional income.

The NHT’s tiered lending structure continues to serve as the market’s affordability backstop. Contributions from the formal workforce accumulate in the Trust’s fund and are recycled as subsidised mortgage finance for qualifying members. The political sustainability of this arrangement — which effectively requires formal-sector workers to cross-subsidise each other’s housing costs through mandatory contributions — is not in question in the current environment, given the absence of any commercial alternative. The NHT’s role has, however, grown to a scale that was not envisioned when the institution was established, and questions about its long-term capital adequacy in a period of high interest rates and rising non-performing loans are beginning to surface.

Looking Ahead

As Jamaica’s property market enters the final months of 1998, the horizon is clouded by both domestic and external uncertainty. Domestically, the pace of FINSAC resolution and the Bank of Jamaica’s monetary stance will be the critical variables. Externally, the deteriorating situation in Russia — whose fiscal position appears increasingly untenable — and the continued contraction in Asia create an environment in which investor risk appetite is declining rather than recovering.

The housing market is likely to remain in its current state of structured immobility for the near term. Vendors without pressing financial need will continue to hold; buyers without access to NHT finance or significant liquid capital will continue to be priced out; and the volume of transactions will remain deeply depressed. The conditions for a recovery — lower interest rates, a resolved FINSAC programme, and restored confidence in Jamaica’s macro outlook — are not expected to materialise before 1999 at the earliest, and may take considerably longer.