Oil Strike, War Footing, and a New Term: Jamaica’s Property Market Opens 2003 in an Uncertain World — February 2003

Publication Date: February 3, 2003 | Coverage Period: January 3–February 2, 2003 | Category: Monthly Review

Month in Brief

• Venezuela’s PDVSA oil strike, triggered in December by Hugo Chavez’s opponents within the state oil company, continues through January, disrupting Caribbean fuel supply and raising energy costs across the region.
• The United States and the United Kingdom intensify preparations for military action against Iraq; UN weapons inspectors report inconclusive findings as international pressure mounts.
• Jamaica’s winter tourism season opens against a backdrop of subdued North American consumer confidence; hoteliers report advance bookings below the levels seen before September 2001.
• The Bank of Jamaica maintains elevated benchmark interest rates; commercial mortgage rates remain in the 20–25 per cent range, effectively excluding the majority of working Jamaicans from formal housing finance.
• The Patterson government, now three months into its third term, begins outlining the legislative and administrative agenda for the year, including housing and land development priorities.
• Construction materials costs show upward pressure from fuel-related freight increases associated with the Venezuela supply disruption.

Housing Market Overview

Jamaica’s property market enters 2003 carrying the weight of a world that has not recovered its equilibrium since September 11, 2001. Fifteen months after the attacks on the United States, the Caribbean tourism industry — the bedrock of north coast property values and a critical driver of the broader Jamaican economy — is still operating below its pre-2001 trajectory. The structural demand for housing remains robust: Jamaica’s population continues to urbanise, households continue to form, and the aspiration to homeownership among the working population has not diminished. But the environment within which that demand must find expression — high interest rates, an uncertain global backdrop, and a government fiscal position constrained by below-trend tourism revenues — remains difficult.

January has added two new sources of concern to an already complicated picture. Venezuela’s PDVSA oil strike, which began in December 2002 as a campaign by workers and management to force President Hugo Chavez from power, continues through January with no clear resolution in sight. For Jamaica, which relies on Venezuelan oil through the PetroCaribe framework and is entirely dependent on imported hydrocarbons, any sustained disruption to regional fuel supply has immediate and concrete consequences: higher electricity generation costs, higher transportation costs, and higher costs for the construction industry’s energy-intensive inputs. The strike has already pushed regional fuel prices higher, and those increases are beginning to appear in the construction cost data that this review monitors.

Meanwhile, the march toward war with Iraq continues with what now appears to be irresistible momentum. United Nations weapons inspectors are working in Iraq and reporting their findings to the Security Council, but the major Western powers — above all the United States — appear to have made their political calculations, and the diplomatic process looks increasingly like a formality preceding a military decision already taken. For Jamaica’s tourism-dependent property market, the prospect of a Middle Eastern war is alarming not primarily because of the direct military stakes but because of its effects on global consumer confidence and oil prices. A war that produces a sharp oil price spike will raise Jamaica’s import bill substantially, widen the current account deficit, and put further pressure on the Jamaican dollar.

Against this backdrop, the residential property market in January has been characterised by cautious activity rather than paralysis. Kingston’s professional segment — the middle-class households purchasing in Cherry Gardens, Barbican, Havendale, and Constant Spring — has maintained reasonable transaction volumes, driven by the essentially domestic nature of that market’s demand. The north coast has been quieter, with the winter season arriving without the booking strength that hoteliers had hoped for. Property enquiries in the resort communities are being made by serious prospective buyers rather than casual browsers, and this selectivity translates into a market that moves slowly but does not stagnate entirely.

Government Policy and the NHT

The Patterson administration, now three months into its third consecutive term following the October 2002 general election, is in the process of translating its election manifesto commitments into a concrete programme of government. Housing featured prominently in the People’s National Party’s campaign, and the government has signalled its intention to accelerate NHT scheme delivery, expand the land titling programme through the National Land Agency, and explore new financing mechanisms for affordable housing.

The NHT’s continuing operation as the primary vehicle for affordable homeownership finance is the most important policy instrument available to the government in the current environment. Its lending rates — zero to five per cent for qualifying beneficiaries — are the only terms at which the majority of working Jamaicans can service a housing loan. The Trust’s balance sheet, built up through decades of employer and employee contributions, provides a capital base that is insulated from the short-term fluctuations in commercial interest rates that make mortgage finance prohibitively expensive through the banking system.

However, the government faces difficult fiscal trade-offs. The 2002 election campaign was fought partly on the basis of housing promises that require capital expenditure — for land acquisition, infrastructure, and construction. At a time when the fiscal position is being squeezed by below-trend tourism revenues and an uncertain external environment, the exchequer’s capacity to supplement NHT capital with direct government investment is constrained. The government will need to be selective and strategic about where it focuses its housing delivery effort in the year ahead.

Construction Sector

The construction sector opened 2003 in a relatively stable but uninspired condition. Public sector projects continue to provide a reliable base of activity. Private residential construction is ticking over rather than accelerating. Tourism-related construction remains in a holding pattern pending clarity on the outlook for tourist arrivals.

The most immediate operational concern for the construction sector is the fuel cost environment created by Venezuela’s PDVSA strike. Diesel, petrol, and heavy fuel oil are all inputs into construction operations — directly, through equipment and generators, and indirectly, through the freight costs of imported materials. If the strike continues into February, or if it recurs, construction cost structures across the island will be materially affected. Contractors working on fixed-price contracts are watching the fuel price situation with particular anxiety.

Skilled labour availability remains a structural constraint. Jamaica continues to lose qualified tradespeople to emigration, particularly to the United Kingdom, Canada, and the United States, where demand for construction skills remains strong. This emigration dynamic is not a temporary phenomenon and cannot be addressed by short-term policy measures; it is embedded in the wage and opportunity differentials between Jamaica and its major diaspora destinations. Its long-term consequence is a construction sector that is capacity-constrained relative to the housing demand it needs to serve.

Investment Climate

The investment climate for Jamaican real estate in January 2003 is cautious. Domestic institutional investors — pension funds, life insurance companies — continue to allocate to commercial and residential property as a diversifier in portfolios dominated by government paper. But appetite for speculative or development-stage investment is limited in an environment characterised by high borrowing costs, uncertain external demand, and geopolitical tension.

Foreign direct investment into Jamaican real estate has been subdued since September 2001 and shows no sign of significant recovery. The Caribbean, as a tourism destination, is perceived by international investors as leveraged to North American consumer confidence, and that confidence remains below its pre-2001 levels. Until there is credible evidence of a sustained recovery in Caribbean tourist arrivals — and until the Iraq situation resolves in a way that is benign for global consumer sentiment — international capital is unlikely to return to Caribbean real estate in volume.

Diaspora Dimension

Jamaica’s diaspora enters 2003 in a complex position. In the United States, the economy has been recovering slowly from the recession of 2001, but the recovery is uneven and consumer confidence is fragile. Jamaican-American communities, concentrated in New York, Florida, and Georgia, are watching the Iraq crisis develop with the specific anxiety of communities whose members are represented in the American military as well as the civilian economy.

Remittance flows have been broadly maintained through 2002 and into January 2003, reflecting the essential nature of the family support function that remittances serve. But property investment — a discretionary activity that requires confidence, planning, and the ability to visit Jamaica to inspect properties and complete transactions — has been deferred by many diaspora members who are waiting for greater clarity about the global outlook. Estate agents report that enquiries from North American and British Jamaicans are being made, but that the conversion rate from enquiry to purchase is lower than it was in 1999 and 2000.

Affordability

Jamaica’s housing affordability challenge is structural, deep-rooted, and not susceptible to quick resolution. At commercial mortgage rates of 20–25 per cent, the monthly debt service on a loan of J$2.5 million — a sum insufficient to purchase even a modest formal housing unit in most urban areas — exceeds the take-home pay of a household at the median income level. The arithmetic of formal homeownership is, for the majority of Jamaicans, prohibitive without NHT support.

The consequence of this affordability gap is the continued expansion of informal settlement — squatter communities where residents occupy land without formal title, building incrementally as resources permit, outside the regulatory frameworks that govern formal construction. These communities house a substantial and growing share of Jamaica’s urban population. The government’s squatter regularisation programme attempts to bring some of these communities within the formal system by granting title to long-term occupants, but the pace of regularisation is consistently outrun by the pace of new informal settlement formation.

Closing the affordability gap requires either a structural decline in commercial mortgage rates — which depends on a sustained reduction in inflation and the normalisation of BOJ monetary policy — or a dramatic expansion of subsidised housing supply through the NHT and related mechanisms. Neither development is imminent, and neither can be willed into existence by policy announcement alone. The housing affordability crisis is a problem of macroeconomic structure as much as housing policy, and it will respond to macroeconomic improvement before it responds to sector-specific interventions.

Looking Ahead

The immediate outlook for Jamaica’s property market in February and beyond depends heavily on two variables outside the island’s control. The first is the Venezuela oil situation: if the PDVSA strike ends and regional fuel supply normalises, one source of cost pressure on the construction sector will ease. The second — and far larger — is the Iraq crisis. The coming weeks will either bring a diplomatic resolution that seems currently improbable, or a military action whose consequences for global commodity prices and consumer confidence cannot be predicted with confidence.

Domestically, the Patterson government’s ability to translate its housing commitments into deliverables will be tested throughout 2003. The NHT’s operational performance, the progress of the land titling programme, and the government’s capacity to attract private sector co-investment into affordable housing delivery will be the key domestic variables this review will monitor. Against an uncertain global background, these domestic policy levers are the factors that Jamaican policymakers can most directly influence — and their importance is heightened precisely because the external environment is so difficult to control.