Steady as She Goes: Jamaica’s Property Market Navigates the October Lull — November 2003

Publication Date: November 3, 2003 | Coverage Period: October 3–November 2, 2003 | Category: Monthly Review

The Month in Brief

• Global equity markets posted solid gains through October, with the US S&P 500 extending its recovery from the March 2003 lows as third-quarter corporate earnings surprised to the upside and the economic recovery appeared to be gaining momentum.
• The Bank of Jamaica’s October data showed Treasury bill yields continuing their gradual downward trend, with the 180-day bill rate easing toward the 14 percent range — still elevated by international standards but meaningfully below the peaks of 2001–2002.
• Oil prices remained elevated above US$30 per barrel, sustained by Middle East uncertainty and stronger-than-expected demand from Asia, maintaining pressure on Jamaica’s import bill and the current account deficit.
• The Patterson government marked the first anniversary of its October 2002 general election victory, with the administration’s housing and infrastructure commitments forming a central element of the PNP’s political messaging for the period ahead.
• Regional tourism performance data for the third quarter confirmed that Caribbean arrivals were tracking materially above the 2002 equivalents, as post-SARS and post-Iraq-war-scare confidence among North American travellers continued its recovery.
• Jamaica’s construction sector showed signs of acceleration in the October data, with permit applications in Kingston and St Andrew parishes up on the same period in 2002, reflecting both improved business confidence and pent-up demand from households who had deferred decisions during the early-2003 period of uncertainty.

Housing Market

October produced a characteristically mixed picture for Jamaica’s residential property market. In the upper segments of the Kingston market — the established communities of Cherry Gardens, Norbrook, Beverley Hills and the upper reaches of Constant Spring Road — demand remained firm, with listing prices holding and turnover time for well-priced properties staying short. The combination of limited supply at the top of the market and sustained demand from the professional and business class has created a structural undersupply dynamic that shows little sign of easing.

In the middle market — the range of properties typically accessible to NHT contributors with supplemental savings — the picture was more nuanced. Buyers in this segment are acutely sensitive to the NHT’s loan limits and to the gap between those limits and actual market prices. In many cases, the NHT contribution covers only a fraction of the purchase price of an established residential property, requiring buyers to bridge the difference through savings, family assistance or (at high cost) commercial top-up financing.

The Portmore housing market on the Hellshire peninsula in St Catherine continued to function as something of a pressure valve for Kingston’s affordability crisis, with relatively affordable house lots and new construction attracting first-time buyers and young families priced out of the capital. The ongoing expansion of road infrastructure connecting Portmore to Kingston has supported property values in the area, though commuting pressures during peak hours remain a persistent concern for residents.

The rural parish market — Manchester, St Elizabeth, Portland, St Mary — continued its quiet but sustained activity, driven primarily by returning residents, diaspora investors and local buyers seeking more affordable land. Lot prices in these parishes, while rising, remain a fraction of equivalent values in the corporate area, making them accessible to a wider range of buyers.

Government Policy and Regulatory Developments

The Patterson government used October — the anniversary of its election victory — to reaffirm its housing policy commitments. The NHT’s parish-level construction programme remained the centrepiece of the government’s affordable housing delivery, with schemes in Clarendon, St Catherine and Westmoreland advancing through the construction phase and approaching the beneficiary selection and allocation stage.

The National Land Agency’s title processing backlog remained a significant operational constraint. Industry observers have long argued that the inability to obtain clear title within a reasonable timeframe — processes that can take years under the current system — imposes a real cost on the property market by delaying transactions, increasing legal costs and deterring investment in communities where informality is prevalent.

The government’s broader economic reform agenda, focused on fiscal consolidation and debt management, continued to limit the scope for direct public investment in housing infrastructure. The structural adjustment dynamic — in which the need to service a very large public debt crowds out capital expenditure — is likely to persist for the foreseeable future, placing a premium on creative public-private partnership arrangements for housing delivery.

Construction Sector

The construction sector’s October uptick in permit activity reflected both genuine demand and a degree of catch-up from the slower-than-usual pace of the first half of 2003. Developers who had deferred project starts in the face of early-year uncertainty about economic conditions were beginning to move forward, supported by improving market signals and by the recovery in both domestic and tourism-related demand.

Materials costs remained elevated, but contractors reported some stabilisation in cement and steel prices after the sharp increases seen in mid-year. Caribbean Cement Company’s production was tracking to meet domestic demand, though the distribution logistics for rural projects continued to represent a meaningful cost uplift for contractors working outside the Kingston-St Andrew corridor.

The hotel and resort development sector on the north coast provided important momentum for the broader construction industry through October. Several all-inclusive properties in the Montego Bay area were undertaking significant renovation and expansion programmes, and smaller boutique developments in Portland and the Blue Mountains were advancing plans for eco-tourism accommodation that, if successful, could stimulate ancillary residential development in those areas.

Investment Climate

October’s strong global equity market performance provided a positive backdrop for investment sentiment broadly. For Jamaica specifically, the improvement in global risk appetite translated modestly into tighter spreads on Jamaican sovereign paper and improved appetite among international investors for Caribbean assets generally. While these capital market dynamics do not directly determine domestic mortgage rates — which remain a function of BOJ policy and local banking sector conditions — they create the external conditions within which a domestic rate reduction cycle can be sustained.

The US Federal Reserve’s continued maintenance of 1 percent federal funds rate through October reinforced expectations of an extended period of accommodative US monetary policy. For Jamaica, this matters in several ways: it keeps the cost of US dollar financing low for government borrowers; it supports the wealth effect among diaspora members with US dollar-denominated assets; and it maintains the interest rate differential that makes Jamaican T-bills attractive to foreign portfolio investors, supporting the exchange rate.

Foreign direct investment into Jamaica’s tourism sector — the most reliable channel through which external capital reaches the island — showed encouraging signs in October, with several international hotel groups signalling renewed interest in Jamaican resort development. The successful containment of SARS and the improvement in global travel confidence have changed the calculus for investors who had been cautious about committing to new Caribbean hospitality projects.

Diaspora Perspectives

October and November mark the period when diaspora planning for the Christmas visit season intensifies. Many overseas-based Jamaicans who plan to visit the island in December are making property-related decisions — whether to list a family home for sale, to enquire about a lot purchase, or to commission construction work on a property held for eventual retirement use. Agents and lawyers in Jamaica’s property sector report a predictable uptick in diaspora-originated enquiries during this period.

The economic environment for the US diaspora — the largest and most active segment in terms of Jamaican property investment — continued to improve through October. Employment in the hospitality, healthcare and construction sectors, where many diaspora Jamaicans are concentrated, tracked positively with the broader US economic recovery. Remittance flows to Jamaica through October were running ahead of the 2002 equivalents, supporting household incomes in recipient communities and, indirectly, sustaining demand for lower-priced housing.

The Canadian diaspora, significant in Toronto, Ottawa and Montreal, operated against a backdrop of the Canadian dollar’s appreciation against the US dollar through 2003, which has modestly reduced the purchasing power of Canadian dollar-denominated savings when converted to Jamaican dollars for property investment. The effect is not large, but it represents a headwind relative to the position of US dollar holders.

Affordability

The affordability metrics for Jamaica’s housing market showed no material improvement through the October period. Construction costs per square foot for modest residential dwellings — the type that NHT schemes deliver — remained elevated, and the gap between NHT loan limits (approximately J$2.0–2.5 million) and the all-in cost of delivering a completed dwelling on a serviced lot continued to widen as materials costs crept upward.

The NHT’s interest rate structure, with rates ranging from 0 to 5 percent depending on contributor income level, represents the most significant affordability intervention available in the Jamaican market. At 0 percent for the lowest earners, the Trust’s lending effectively functions as a grant-equivalent for a substantial portion of the loan cost, making homeownership viable for households that would be entirely excluded from any market-rate financing.

For households above the NHT income threshold but below the level at which commercial mortgage finance becomes serviceable, the market offers very limited options. This “middle gap” — too affluent for maximum NHT subsidy, too constrained to service 20 percent commercial mortgages — represents a structural challenge that neither government nor the private sector has yet addressed adequately.

Looking Ahead

As November opens, Jamaica’s housing market faces the approach of its seasonal peak with a mixture of cautious optimism and structural constraint. The global backdrop is the most supportive it has been in several years: equity markets are rising, the US economy is accelerating, SARS is contained and the Iraq conflict’s formal combat phase is behind us. These conditions should, over time, translate into improved economic conditions in Jamaica and gradually improved access to housing finance.

The immediate constraints — high interest rates, limited titled land supply, elevated construction costs and administrative bottlenecks at the NHT and the National Land Agency — will not resolve quickly. But the direction of travel is clearer now than it was a year ago, and for patients investors and buyers willing to take a medium-term view, the case for Jamaica property exposure is becoming easier to make.

The December quarter’s data will provide the next meaningful read on the market. Our attention will be particularly focused on NHT loan approvals, construction permit volumes and tourist arrival statistics as leading indicators of the housing market’s near-term trajectory.