FINSAC’s Grip Begins to Ease: Housing Affordability in the Final Quarter of 2000

Jamaica Homes Housing Affordability & Cost of Living Review — October 2000

• FINSAC’s portfolio resolution is progressing; the most acute phase of Jamaica’s financial crisis is behind the country, though the fiscal legacy will persist for years
• Commercial mortgage rates have peaked and begun a very gradual decline from their crisis extremes; the direction is positive but the pace is far too slow for working-class buyers
• NHT continues to provide the primary formal housing finance mechanism; its contributor-funded below-market rates are the only accessible mortgage product for most of the workforce
• The economy is showing early stabilisation signals; the IMF programme is being managed; the primary surplus is being maintained
• Housing market confidence is at a cyclical low; buyer activity is subdued as households manage the economic strains of the FINSAC period
• The informal housing sector has expanded significantly through the crisis years; community self-build and family land have absorbed the demand that formal channels cannot serve

October 2000 marks, cautiously, the beginning of a very gradual improvement in the interest rate environment that has been the defining constraint on Jamaica’s housing affordability since the FINSAC financial crisis began in earnest in 1997. The Financial Sector Adjustment Company, established to manage the resolution of failed financial institutions and protect depositors, has been working through its portfolio for three years; the most acute emergency is behind Jamaica. The commercial financial sector, while contracted and shaken by the crisis, is functionally operational. The Bank of Jamaica’s monetary policy is beginning to ease from the extreme tightness that the crisis environment required.

For Jamaica’s housing market, the significance of this shift is profound but delayed. Commercial mortgage rates, which reached extraordinary heights during 1998-1999 as the FINSAC crisis intensified and the financial system’s survival was uncertain, have peaked. They have not fallen to anything approaching affordability for working Jamaicans; but the direction has changed. The easing is measured in single percentage points, not the double-digit movements that would make a material difference to working-class buyers’ mortgage eligibility. At this pace, the commercial mortgage market will not become accessible to median-income households for years. The NHT remains, unambiguously, the only formal housing finance vehicle for the majority of Jamaica’s working population.

The Cost of the FINSAC Rescue

The FINSAC rescue has come at an enormous fiscal cost. The government liabilities assumed to protect depositors and stabilise the financial system have added significantly to Jamaica’s public debt; estimates suggest that the total cost of the FINSAC resolution may represent as much as forty percent of GDP when fully accounted for. This debt addition has become a major component of the fiscal burden that keeps interest rates high: the government must borrow heavily in the domestic market to service FINSAC-related obligations, and this borrowing competes with private sector credit for the available pool of domestic savings, keeping borrowing costs elevated. The direct link between the FINSAC rescue and the housing unaffordability that working Jamaicans are experiencing is clear: FINSAC’s fiscal cost is being paid, in part, by every NHT contributor who cannot access a commercial mortgage.

What This Means

For NHT contributors, October 2000 is a period in which the NHT system’s value has never been more apparent. The commercial mortgage market, at its current rates, is simply not an option for most working Jamaicans; the NHT’s below-market rates are not just more affordable but categorically different in kind. Contributors who have maintained their records through the difficult FINSAC years are in the strongest position to access the housing market’s only viable formal vehicle. Contribution continuity through a difficult economic period is its own form of housing investment.

For the informal sector, October 2000 reflects a housing sector that has expanded through the crisis years as formal channels contracted. The informal construction and family land settlement that has housed much of Jamaica’s working class through the FINSAC period has demonstrated the resilience that this sector has always provided in the absence of adequate formal supply. The challenge of eventually regularising these communities — through land titling, service connections and building code compliance — will be one of the housing agenda’s most important items in the post-crisis recovery period.

The Outlook: Light at the End of a Long Tunnel

Jamaica’s housing market in October 2000 has reason for cautious optimism that was not available a year ago. Commercial rates have peaked. The acute crisis phase is ending. The fiscal consolidation programme is being maintained. These are the right conditions for a gradual improvement in housing affordability over the coming years. The improvement will be slow; it will take years of sustained fiscal discipline to translate into mortgage rates that working Jamaicans can access through the commercial system. In the meantime, NHT is the vehicle, and the contributors who have maintained their records through the hardest years will be first in line when conditions improve.

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

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