Saddam Captured, Mad Cow Detected: December’s Shocks and Jamaica’s Year-End Property Balance — January 2004

Publication Date: January 3, 2004 | Coverage Period: December 3, 2003–January 2, 2004 | Category: Monthly Review

The Month in Brief

• Former Iraqi president Saddam Hussein was captured by US forces near Tikrit on December 13, 2003, marking a significant turning point in the post-invasion occupation and prompting a brief but notable rally in global equity markets.
• The United States confirmed its first domestic case of bovine spongiform encephalopathy (BSE, or mad cow disease) on December 23, triggering immediate export bans from Canada, Japan, South Korea and Mexico — raising concern about the integrity of North American beef supply chains.
• The Bank of Jamaica maintained its policy stance through December, with Treasury bill yields settling in the 14–16 percent range as the central bank sought to balance inflation containment against the need for credit expansion in a modestly growing economy.
• Jamaica’s tourism sector recorded a strong December, with hotel occupancy rates in Montego Bay and Negril approaching pre-September 11 levels, reflecting both improving global travel confidence and effective marketing by the Jamaica Tourist Board.
• Year-end data from the Statistical Institute of Jamaica suggested GDP growth for 2003 in the range of 1.5–2.5 percent — modest by regional standards but representing a continued recovery from the 2001–2002 downturn.
• Prime Minister PJ Patterson’s PNP administration signalled that the 2004 budget would maintain emphasis on fiscal consolidation while seeking to accelerate infrastructure investment, particularly in the transport and housing sectors.

Housing Market

December closed what has been, on balance, a year of quiet but meaningful recovery for the Jamaican residential property market. The pace of transactions — never brisk in a market characterised by high financing costs and constrained mortgage availability — nonetheless held up reasonably well through the final quarter, with Kingston and St Andrew continuing to account for the largest share of formal sales activity.

Listing prices for established residential properties in the New Kingston corridor and the upper reaches of St Andrew have remained firm, supported by demand from the professional class and from returning residents. In the resort parishes — St James and Westmoreland in particular — international buyers and the diaspora continued to show interest in villa and condominium product, with inquiries from North American-based Jamaicans rising as travel confidence improved through the second half of the year.

The lower end of the market, where affordability constraints are sharpest, remained subdued. Commercial mortgage rates in the 18–22 percent range continue to place conventional bank financing beyond the reach of the majority of working Jamaicans, leaving the National Housing Trust as the primary vehicle for lower- and middle-income homeownership. That dynamic is unlikely to change materially in the near term without a more sustained decline in the Bank of Jamaica’s policy rate.

The Saddam Hussein capture, while primarily a geopolitical event, had a secondary market effect worth noting: the brief equity market rally that followed on December 15–16 saw some institutional investors rotate out of safe-haven positions, modestly improving the appetite for emerging market assets. Jamaica’s external financing conditions may benefit marginally at the margin, though the direct impact on domestic mortgage rates will be lagged and indirect.

Government Policy and Regulatory Developments

The Patterson administration has entered 2004 with a clearer mandate than a year ago, following the October 2002 general election victory. The government’s housing policy agenda for the year ahead is expected to centre on three priorities: expanding NHT coverage, accelerating divestment of government-owned lands for residential development, and pursuing amendments to the Registration of Titles Act to reduce conveyancing delays that have long frustrated both buyers and lenders.

The National Land Agency continues to process a backlog of title applications, a structural problem that predates the current administration but which has received renewed attention as the government seeks to formalise land tenure for low-income communities. Without clear title, residents cannot access formal mortgage finance, perpetuating cycles of informal settlement and underinvestment in housing stock.

The Ministry of Finance’s pre-budget consultations, ongoing in December, are expected to address the question of stamp duty relief for first-time buyers below a certain property value threshold — a measure that has been under discussion for several years and which, if enacted, could meaningfully stimulate formal market activity at the entry level.

Construction Sector

Construction activity across Jamaica’s parishes showed continued momentum in the December quarter, though the sector remains constrained by the cost and availability of building materials — many of which are imported and subject to exchange rate pressure as the Jamaican dollar continues its gradual depreciation against the US dollar.

The NHT’s own construction programme pushed forward with schemes in St Catherine, Clarendon and St Elizabeth, targeting the beneficiary segments that private developers have found economically unviable to serve. NHT loan limits, currently in the J$2.0–2.5 million range, have not kept pace with construction cost inflation over the past three years, creating a growing gap between what the Trust will lend and what it actually costs to build a modest but adequate dwelling.

Private developers in the upper market segment — Portmore Peninsula, the hills above Kingston, and the resort towns along the north coast — reported solid forward booking of units through the end of the year, a signal that demand from higher-income buyers and investors remains intact. The challenge, as always in Jamaica, is translating that demand at the top of the market into a construction boom that cascades through the wider economy.

Investment Climate

The capture of Saddam Hussein and the evident progress — however contested — of the post-war political process in Iraq has, on the margins, reduced one of the major sources of global uncertainty that characterised 2003. Oil prices, which had spiked ahead of the March invasion and remained elevated through much of the year, showed some moderation in December, trading below US$33 per barrel — a modest relief for Jamaica’s import bill given the country’s near-total dependence on imported petroleum products.

For property investors specifically, the question as 2004 opens is whether global risk appetite — now improving — will translate into increased capital flows to Caribbean real estate. Jamaica has historically attracted foreign direct investment in tourism infrastructure rather than residential property, but the two markets are not entirely separate: hotel and villa development in resort areas tends to lift surrounding residential values and to stimulate demand for ancillary services.

The mad cow disease scare in the United States, while not directly relevant to property markets, adds a layer of caution to the general economic outlook. If US consumer confidence softens — and early surveys suggest December retail spending may come in below expectations — the pace of economic recovery in Jamaica’s most important tourism source market could slow heading into the early months of 2004.

Diaspora Perspectives

The Jamaican diaspora — concentrated in New York, London, Toronto, Miami and Hartford — remains the single most important source of external capital for the domestic property market. Remittance flows, which the Bank of Jamaica estimates at well over US$1 billion annually, represent a critical support for household income in many communities and serve as the effective deposit base for a significant share of NHT-financed home purchases.

The Christmas season, as always, brought a surge of diaspora visits to Jamaica — a period during which many overseas-based Jamaicans assess property opportunities, visit family homes, or make decisions about retirement or investment purchases. Anecdotal evidence from real estate agents in Kingston and Montego Bay suggests that diaspora interest in Jamaican property was notably strong in December 2003, with inquiries about land and house lots particularly buoyant.

The strong performance of the US economy in the second half of 2003 — GDP growth running at an annualised rate well above 6 percent in the third quarter — has strengthened the financial position of many diaspora members and increased their capacity and confidence to invest in Jamaican real estate. The question is whether the infrastructure of property transaction — title search, conveyancing, mortgage origination — is efficient enough to convert that interest into completed deals.

Affordability

By any measure, the affordability challenge in Jamaica’s housing market is acute. The gap between household incomes and the cost of formal-sector housing — even at the modest specification levels typical of NHT schemes — remains one of the widest in the Caribbean. A formal sector worker earning the national minimum wage of approximately J$900 per week can service only the smallest NHT loan at the Trust’s concessional rates, and is entirely priced out of commercial bank mortgage finance.

Even for households earning two to three times the minimum wage — a category that includes teachers, nurses, junior civil servants and lower-ranked police and military personnel — the combination of high land costs, construction costs, and financing costs places conventional homeownership beyond reach without NHT support. The Trust’s concessional rates of 0–5 percent remain the critical intervention that makes homeownership viable for this segment.

As the Bank of Jamaica’s policy rate gradually declines — a process that began in 2002 and which is expected to continue in 2004 — commercial mortgage rates should follow with a lag of several quarters. Every 100 basis points of reduction in commercial rates effectively expands the potential borrower pool by a meaningful margin, making the trajectory of BOJ policy among the most important variables for the housing market’s medium-term outlook.

Looking Ahead

The year 2004 opens with grounds for cautious optimism about Jamaica’s housing market. Global conditions have improved materially since the dark days of early 2003, when SARS, the Iraq invasion and persistent economic weakness in the United States cast a shadow over Caribbean tourism and economic prospects. The capture of Saddam Hussein, whatever its long-term implications for Iraqi stability, has removed one source of geopolitical anxiety from the global equation.

Domestically, the Patterson government approaches its second year of its third term with a clearer policy agenda and with the fiscal position — while still demanding attention — somewhat more stable than two years ago. The NHT continues to function as the backbone of affordable housing delivery, and the construction sector, while constrained, is active.

The risks, as always, are real. Crime continues to impose a deadweight cost on the economy and to deter investment in certain communities. The exchange rate depreciation, while moderate, raises the cost of imported building materials. And the external environment, while improving, remains uncertain — the mad cow scare, however contained, is a reminder that global shocks can arrive without warning.

Our next edition will assess the market as the first-quarter 2004 data begin to come into focus. For now, the balance of evidence suggests a market on a slow but discernible path of recovery — one that rewards patience and structural engagement over speculation.