China’s Building Boom Reaches Jamaica: Rising Steel Prices Add to Construction Costs — July 2004

Publication Date: July 3, 2004 | Coverage Period: June 3–July 2, 2004 | Category: Monthly Review

Month in Brief

• Global steel prices reach their highest level in two decades, driven by Chinese infrastructure demand; Jamaican contractors report input cost increases of 20–30% year-on-year, threatening the viability of approved but uncommenced residential projects.
• The Bank of Jamaica holds its overnight rate steady, citing persistent inflationary pressure from global commodity costs and domestic fuel price pass-through.
• Tourism arrivals for the May–June period register a year-on-year increase for the third consecutive quarter, the first such sustained run since the September 2001 attacks; Montego Bay airport capacity utilisation improves notably.
• The NHT announces a modest expansion of its open-market mortgage facility, broadening eligibility criteria for self-employed contributors whose informal income documentation had previously excluded them from the programme.
• Global oil prices trade in the US$35–40 per barrel range, maintaining upward pressure on freight costs for Jamaica’s import-dependent economy.
• The US Federal Reserve raises its benchmark rate by 25 basis points to 1.25% — its first increase in four years — signalling the beginning of a normalisation cycle that will have implications for diaspora mortgage capacity and capital flows.

Housing Market

Jamaica’s residential property market in the June coverage period continues its trajectory of selective recovery. The pattern that emerged in the preceding months is now firmly established: upper-tier and diaspora-targeted properties are performing with genuine vigour, while the mid-market and affordable segments remain constrained by a combination of high borrowing costs, rising construction costs, and stagnant real incomes.

The Kingston and St. Andrew premium residential market has seen a number of high-profile transactions in the period, with properties in Norbrook, Cherry Gardens, and the upper reaches of Barbican attracting competitive interest from both domestic and overseas purchasers. Agents in these markets report that well-maintained properties with secure title are selling at or above asking price, a phenomenon not widely observed since the mid-1990s boom period.

In the middle market, the picture is less buoyant. Properties in the J$6–12 million range — the segment nominally within reach of the professional middle class — are trading more slowly, as potential buyers face the double constraint of high commercial mortgage rates and lender reluctance to extend credit without substantial deposits. The NHT’s open-market programme partially addresses this gap, but the Trust’s resources are finite and allocation is competitive.

The rural and peri-urban residential land market continues to show pockets of activity in St. Catherine, where speculation around the Highway 2000 development and ancillary infrastructure continues to attract investors seeking capital appreciation plays rather than income-generating assets.

Government Policy

The Patterson government’s housing policy framework in mid-2004 is characterised by structural continuity rather than innovation. The NHT-led model — contributor savings financing subsidised mortgage lending into both scheme and open-market channels — has been the backbone of affordable housing provision for three decades and remains so. The period under review has brought incremental adjustments rather than fundamental reform.

The most significant policy development is the NHT’s revised treatment of self-employed contributors. Jamaica’s large informal sector has historically been systematically disadvantaged in the housing finance system, not because of any deliberate exclusionary intent but because the documentation requirements for income verification — designed for the salaried employee with pay stubs and PAYE deductions — are poorly suited to entrepreneurs, market traders, and the self-employed. The NHT’s revised guidelines represent a practical acknowledgement of this structural inequity.

Land titling remains a chronic challenge. The work of the Land Administration and Management Programme continues, but the backlog of informal and unregistered land holdings — particularly in older inner-city communities and rural areas — means that a significant proportion of the island’s residential real estate cannot be mortgaged or transacted with full legal confidence. Resolving this will require sustained institutional effort well beyond the current political cycle.

Construction Sector

The construction sector faces its most challenging cost environment in a generation. The proximate cause is the extraordinary pace of Chinese economic development. China is now consuming approximately 27% of global steel output, a share that has doubled in less than a decade, and the infrastructure investment underpinning this consumption shows no sign of near-term deceleration. The International Iron and Steel Institute’s latest data show global steel prices at their highest nominal level since the 1980s.

For Jamaica, the consequences are direct and painful. The island imports virtually all of its steel requirements — rebar, structural sections, and roofing materials — and the cost increases are absorbed by contractors and developers without the buffer of significant domestic production. Builders of residential properties in the J$8–20 million range report that their cost per square foot has increased by between 18% and 28% over the past eighteen months, a rate that is rapidly eroding project viability.

Cement is a partial exception, given the presence of Caribbean Cement Company’s local production capacity, but even here, the cost of energy-intensive production has been affected by rising global fuel prices. The net effect across the input basket is a construction sector facing sustained inflationary pressure from multiple sources simultaneously.

Hotel and commercial construction — which benefits from access to longer-term foreign financing and higher value-to-cost ratios — is better insulated than residential development. Several tourism plant upgrades announced in the post-9/11 period are proceeding to schedule, and one or two new boutique resort projects have entered the planning phase, reflecting growing confidence in the tourism recovery.

Investment Climate

The US Federal Reserve’s decision to raise rates by 25 basis points at its June meeting — the first increase since May 2000 — is a landmark moment that deserves attention from Jamaican property market participants. The Fed’s own projections suggest a series of measured increases through the remainder of 2004 and into 2005, as the central bank seeks to normalise policy from the emergency low of 1% at which it has sat for twelve months.

For the Jamaican market, the implications are twofold. First, rising US rates will eventually translate into higher borrowing costs for diaspora Jamaicans with US mortgages, potentially reducing the equity extraction capacity that has funded a significant share of Jamaican property purchases in recent years. Second, as US and other developed-market yields rise, the relative attractiveness of Jamaican fixed-income assets — which currently offer substantial nominal yields — may shift, affecting both the JMD/USD exchange rate and the BOJ’s own rate trajectory.

These dynamics are not yet acute; the Fed’s tightening is proceeding gradually and from an extraordinarily accommodative base. But investors with medium-term horizons should be considering the implications of a US rate environment at 3–4% within two years, rather than anchoring their assumptions to the current 1.25%.

Diaspora Dimension

The US rate increase warrants particular attention from diaspora Jamaicans who have been leveraging the US housing boom to extract equity for Jamaican property purchases. The mechanism — refinancing a US mortgage at a lower rate while drawing cash against appreciated collateral — has been spectacularly effective in the 2002–04 period, when rates fell to generational lows and US home prices rose 30–50% in many diaspora-dense markets such as South Florida, New York, and the tri-state area.

The June rate rise does not immediately disrupt this dynamic; US mortgage rates have barely moved, and the housing market shows no sign of cooling. But the direction of travel has changed. Diaspora investors who have been planning Jamaican property acquisitions and have not yet acted would be well advised to accelerate their timelines rather than assume the current favourable conditions will persist indefinitely.

UK-based diaspora members face a different dynamic. The Bank of England has also been considering its rate trajectory as the UK economy performs strongly. Sterling’s relative strength has made Jamaican property more affordable in GBP terms over the past year, an advantage that could narrow if the currency relationship shifts.

Affordability

The rising cost of construction materials is, paradoxically, an affordability issue as much as a supply issue. When construction costs rise faster than property values — as is currently occurring in the affordable and middle-market segments — developers who might otherwise build new units at accessible price points find those projects economically unviable. The result is a supply constraint that sustains existing price levels even as demand from lower-income buyers remains weak.

This dynamic is particularly acute in the J$4–8 million residential range — the segment most relevant to the aspirational working class and junior professional demographic. NHT scheme housing remains the primary mechanism for serving this market, but the Trust’s capacity is insufficient to clear the pent-up demand, and the waiting list dynamics create frustration and delay for applicants who are, in many cases, accumulating contributions for years without being able to access the housing the scheme nominally promises.

There is growing advocacy within the construction and development community for a government review of the import duty and general consumption tax treatment of building materials. Reducing the tax burden on steel, cement, timber, and fittings would partially offset the global price increases and could meaningfully improve project economics for affordable housing developers. The fiscal cost of such a concession is real, but its proponents argue it would be offset by the economic activity and social benefit generated by increased housing supply.

Looking Ahead

The next review period will see Jamaica’s national attention pivot sharply to Athens as the Olympic Games open on August 13. The athletic programme promises to be the highlight of the national calendar, and the global visibility that Jamaica’s track and field programme commands offers a marketing platform for the island’s tourism and investment proposition that money cannot easily buy.

In the property market, the variables most worth monitoring are the pace of BOJ rate adjustment, the trajectory of US interest rates and their effect on diaspora purchasing capacity, and the question of whether global commodity price inflation is proving transitory or structural. If the consensus view among commodity economists — that Chinese demand represents a permanent structural shift in global materials markets rather than a cyclical spike — proves correct, the Jamaican construction industry will need to fundamentally recalibrate its cost models for the years ahead.

Jamaica Homes Monthly Housing & Development Review is published on the first Saturday of each month. All market data reflects conditions prevailing during the stated coverage period. This publication does not constitute financial or legal advice.