The Fire This Time: Jamaica’s Property Market at Mid-1999 and the Full Horror of What FINSAC Has Done

When a fire burns through a building, it does not destroy everything at once. It moves room by room, consuming what it finds, leaving behind a landscape that is neither the original structure nor an empty site. Some rooms are gutted completely — the timber is ash, the plaster is gone, the floorboards have fallen through to the storey below. Other rooms are merely damaged — smoke-blackened, heat-warped, their contents destroyed even if their structure survives. And some rooms, protected by a closed door or a twist of the air currents, emerge from the fire almost intact: charred at the edges, smelling of smoke, but fundamentally still themselves. Jamaica’s financial sector, between 1996 and 1999, burned. And the property market, the room most intimately connected to the financial system’s health, has been comprehensively gutted. We are standing, in mid-1999, in the ruins of a fire that has not yet fully gone out. The smoke is still rising. The embers are still hot. And the work of understanding what has been lost, before the work of rebuilding can begin, is barely underway.

The year 1999 finds Jamaica’s property market at what may be its historical nadir. The FINSAC financial sector crisis, which began to accelerate in 1996 and has now claimed or restructured a significant proportion of the Jamaican financial system, has fundamentally altered the landscape in which property transactions occur. The institutions that originate mortgages, the insurance companies that hold long-term property investments, the building societies that mobilise household savings into housing finance — all of these have been transformed, most of them in ways that have reduced their capacity to perform the functions the property market depended upon them to perform.

Reviewing 1998: The Year the Cascade Became a Flood

The year 1998 was the year in which Jamaica’s financial sector crisis moved from a serious problem that the government was managing to a systemic collapse that was managing the government. The cascade of institutional failures that had begun in 1996 with the collapse of Century National Bank and a series of smaller merchant banks accelerated in 1997 and reached flood proportions in 1998, as the interconnectedness of Jamaica’s financial sector — the cross-holdings, the interbank exposures, the shared loan books backed by the same overvalued collateral — caused the failure of one institution to threaten the viability of others.

The government’s response — the creation of FINSAC in January 1997 and the use of government-guaranteed bonds to recapitalise failing institutions and protect depositors — was, in the circumstances, the only credible option available. The alternative — allowing systemically important financial institutions to fail without government intervention — would have exposed Jamaican depositors to losses on a scale that the economy could not have absorbed without social and economic consequences that are difficult to contemplate. The government chose to intervene, and in doing so committed to a fiscal burden whose full scale would only become apparent over the following years.

For the property market, 1998 was the year in which the true consequences of the financial sector collapse began to crystallise in asset values. The institutions under FINSAC management held, as collateral on non-performing loans, an enormous portfolio of property assets across all segments of the Jamaican market. Commercial properties in New Kingston and the Half Way Tree business districts. Residential properties in the upper-market communities of Cherry Gardens and Norbrook. Development land in the resort corridors of the north coast. Agricultural land in the rural parishes. All of this property — held not by investors who chose to own it, but by institutions that had acquired it involuntarily through the foreclosure process — needed to be sold. And it needed to be sold into a market that had been severely damaged by the same crisis that had produced the distressed portfolio in the first place.

The resulting forced sales created a downward price spiral in certain segments. FINSAC-held commercial property being disposed of at distress prices established comparables that other sellers were forced to reference. Properties that had been valued at peak mid-1990s prices for collateral purposes — valuations that had, in some cases, been optimistic even at the time — were now being sold at fractions of those values, creating negative equity for borrowers, losses for the institutions, and a market signal of collapsing values that suppressed demand from buyers who might otherwise have considered purchasing.

The Architecture of Collapse: How FINSAC Happened

Understanding how the FINSAC crisis happened is essential to understanding why Jamaica’s property market is in the state it is in 1999. The crisis was not random. It had a specific architecture — a set of structural vulnerabilities in Jamaica’s financial system that made the collapse, if not inevitable, then at least entirely comprehensible in retrospect.

The first structural vulnerability was the concentration of the financial sector’s loan books in property-related assets. Through the late 1980s and into the 1990s, Jamaica’s building societies, commercial banks, and insurance companies had become increasingly exposed to the property sector — partly through direct mortgage lending, partly through loans to property developers, and partly through the purchase of property as an investment asset in their own right. When property values were rising, as they were through the early-to-mid 1990s, this concentration appeared prudent: property seemed like the safest collateral available, and the rising market provided a comfortable cushion between loan values and collateral values.

When property values began to fall — as they did from the mid-1990s, under the pressure of rising interest rates that reduced affordability and slowed the development sector that had been driving upper-market price growth — the concentration that had seemed prudent revealed itself as catastrophic. Loans secured by property that was worth less than the loan outstanding created negative equity. Borrowers who found themselves in negative equity had reduced incentive to continue servicing loans. Loan default rates rose, which increased institutions’ provisions for bad debts, which reduced their reported capital, which triggered regulatory concerns about solvency, which prompted depositor withdrawals, which reduced liquidity, which threatened the institutions’ ability to meet obligations.

This is, in outline, the mechanism of almost every banking crisis in history. What made Jamaica’s version particularly severe was the additional factor of the interest rate environment in the early 1990s. In an effort to stabilise the exchange rate and control inflation in the context of the structural adjustment programmes of the early 1990s, the Bank of Jamaica had allowed domestic interest rates to rise to extraordinary levels — at times above 50 percent in nominal terms. These extreme rates inflated the headline returns that financial institutions could earn on their investments, attracting a wave of deposits from savers seeking yields that no international market could match. But they also inflated the carrying costs of property loans to levels that the cash flows from the underlying properties could not service, creating a loan quality problem that was invisible while rates were high but became explosive when rates began to normalise.

The Property Market in 1999: A Market Without a Functioning Lender

In mid-1999, Jamaica’s property market is operating without a functioning commercial mortgage market in any meaningful sense. The building societies that survived the FINSAC crisis — primarily the Jamaica National Building Society and the Victoria Mutual Building Society, which had navigated the crisis with their depositor bases and lending capacity relatively intact — are lending at rates in the 18-20 percent range that produce monthly payments on any property above the most modest that exceed the incomes of the majority of Jamaican households. The commercial banks that remain active — primarily the foreign-owned subsidiaries of international banks whose capital bases were not exposed to the FINSAC collapse — are lending at comparable rates and with qualification criteria that reflect their conservative post-crisis risk appetite.

The NHT alone is lending at rates that make formal homeownership possible for working Jamaicans. Its subsidised rate programme — offering rates from 3 to 6 percent to qualified contributors across the income bands it serves — represents the only mechanism through which the majority of Jamaican households can access formal mortgage finance at amounts that are meaningful relative to actual property prices. The NHT’s development pipeline, though constrained by budget limitations and by the practical difficulties of developing new housing in an environment of rising construction costs, is the primary source of new formally-financed residential stock.

The remainder of the property market — the segment that depended on commercial mortgage finance, on insurance company investment, on the confident participation of the building societies that have now been restructured or absorbed — has effectively ceased to function in formal transactional terms. Properties are listed. Negotiations sometimes occur. Very few transactions complete. The gap between what sellers believe their properties are worth and what buyers are willing, or able, to pay is enormous and shows no sign of narrowing in an environment where the credit that would allow buyers to bridge that gap is simply not available.

Looking Ahead to 2000: A Long Road That Has Barely Begun

The forecast for 2000 is not one of recovery. It is one of the beginning of recovery — a distinction that matters enormously for anyone who is waiting for the property market to return to the transactional activity and price levels of the mid-1990s. That return will happen, eventually. But it will not happen in 2000, and it will not happen quickly.

The preconditions for property market recovery — a functioning commercial mortgage market at rates that allow a significant proportion of the population to qualify, a restored supply of development finance, a financial sector with the institutional capacity and risk appetite to originate and hold property-secured debt — are not present in 1999 and will not be present in 2000. They will be present, eventually, as the FINSAC fiscal burden is gradually reduced, as domestic interest rates slowly decline, and as the surviving institutions rebuild their capital bases and their appetite for property-related lending. But this is a process measured in years, not months.

What 2000 should bring is stabilisation: the cessation of active deterioration, the beginning of the slow process of price discovery in a market where forced FINSAC sales are no longer setting the distress-level comparables that have been pushing values down. The FINSAC disposal programme will not be complete by 2000 — the portfolio is too large and the market too thin for rapid disposal — but the pace of distressed sales should slow as the most urgent disposals are completed, removing some of the downward pressure on values.

The fire is beginning to go out. The embers will be hot for a long time. The smoke will take years to clear. But the active burning is slowing. And when the fire is finally out, the task of understanding what remains — what has been destroyed beyond recovery and what can be salvaged, restored, rebuilt — can begin in earnest. Jamaica’s property market in 2000 will be that first careful survey of the ruins: painful, necessary, and the essential first step toward building something new.