Publication date: 5 October 2006 | Covering: July – September 2006
Quarterly Briefing
- Fed ends hiking cycle: June 29 final hike to 5.25%; August and September meetings hold; Bernanke signals pause; seventeen consecutive hikes complete
- Lebanon-Israel war: July 12 – August 14; Hezbollah cross-border raid triggers Israeli ground and air offensive; 34-day war; UN ceasefire UNSCR 1701; 1,200 Lebanese killed
- Oil falls from peak: From US$77 in July falls toward US$60 by September; seasonal demand easing; hurricane season less disruptive than 2005
- US housing starts: Falling 20% year-on-year; homebuilder stocks collapsing; inventories rising sharply; correction accelerating but prices still elevated in most markets
- Pluto reclassified: August 24 International Astronomical Union votes; Pluto no longer a planet; eight planets remain; cultural moment
- UK economy: Housing market stabilising after 2005 softness; Bank of England holds; sterling firm
- Dow Jones: Recovers to near all-time highs; credit spreads tight; risk appetite recovering after mid-year selloff
- Jamaica: Tourism recovery post-Dean preparedness; construction sector active; NHT lending programmes ongoing
Fed Pauses; Lebanon-Israel War; Oil Retreats
The third quarter of 2006 was defined by three major developments: the Federal Reserve’s decision to end its unprecedented seventeen-consecutive-hike tightening cycle, a brief but intense Middle East war, and the continuation of the US housing market correction. The Fed had raised rates continuously from June 2004 — beginning at 1% and ending at 5.25% — as it normalised policy from the post-dotcom, post-9/11 accommodation that had, in hindsight, contributed to the conditions for the housing bubble. At the August and September 2006 FOMC meetings, Bernanke’s Fed held rates steady, signalling that the tightening cycle had run its course. The moderation in oil prices from July’s peak and the cooling housing market both contributed to easing inflationary pressure, giving the Fed room to pause. Oil, which had reached approximately US$77 per barrel in July — partly driven by the Lebanon-Israel war’s geopolitical risk premium and hurricane season anxiety — retreated toward US$60 by September as the ceasefire held and hurricane season proved less destructive than 2005. The Lebanon-Israel conflict itself, triggered by a Hezbollah cross-border raid on 12 July and ending with a UN-brokered ceasefire on 14 August, resulted in the deaths of approximately 1,200 Lebanese and 165 Israelis, and left significant destruction in southern Lebanon. The conflict had significant implications for regional stability and Israel-Lebanon relations but limited direct economic impact on global markets beyond the oil price.
US Housing Correction; Subprime Warnings
The US housing market correction accelerated through the third quarter of 2006, with housing starts running approximately 20% below the prior year’s level, homebuilder stocks having collapsed from their peaks, and unsold new home inventories rising sharply. The correction was most acute in the markets that had experienced the most extreme price appreciation: Florida, Nevada, Arizona, and California. Mortgage lending standards, which had been progressively relaxed through the boom years — with the proliferation of no-documentation, interest-only, and negative-amortisation loans to increasingly marginal borrowers — were beginning to tighten as defaults rose in the subprime segment. The full scale of the exposure that major financial institutions had built up through structured mortgage products was not yet recognised publicly, but the early signs of subprime deterioration were visible to careful observers.
Jamaica: Tourism and Construction; Mortgage Conditions
Jamaica’s economy in the third quarter of 2006 benefited from a relatively active construction sector and strong tourism performance. The fall in oil prices from their July peak provided some relief to the island’s import bill. The Bank of Jamaica maintained a stable monetary stance, with domestic rates elevated but the broader macroeconomic environment manageable. The NHT continued its lending programmes at subsidised rates of 0%, 2%, and 4% on loans up to J$6.5 million individually or J$13 million for two-applicant borrowings. The gap between NHT’s subsidised rates and commercial mortgage rates remained wide, continuing to position the NHT as the primary affordable housing finance mechanism for Jamaican workers.
Looking Ahead to Q4 2006
With the Fed on pause at 5.25% and oil retreating from peaks, the financial backdrop is broadly constructive. The US housing correction is the primary risk — how deep it goes and whether it spreads from the subprime mortgage market to the broader financial system will be the defining question of 2007. For Jamaica, the approach of the peak winter tourism season and continued management of the island’s debt burden are the key domestic priorities.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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