Two things are happening simultaneously in Jamaica’s property market as the second quarter of 2007 closes, and they are pulling in opposite directions. Domestically, the election that must come before October has produced the deepest discretionary pause in transactions this market has seen in eighteen years of continuous PNP government. Externally, the structured finance edifice that the United States built on subprime mortgages has cracked in ways that no one yet knows how to price — and Jamaica, however structurally insulated from the mechanism of the crisis, is not insulated from its consequences.
Highlights
- General election expected August-September 2007; transaction volumes down 20-25%
- Pre-election asking prices holding but negotiating room expanding for buyers
- Bear Stearns hedge funds collapse in June signals depth of US subprime exposure
- BOJ repo rate at 11%; Jamaica government external borrowing costs beginning to edge up
- Diaspora remittance risk elevated as US employment conditions soften
- Falmouth Pier confirmed; Trelawny land market remains active as only clear growth story
The pause is not a crisis. Transactions are still closing across every segment of the market — the NHT continues to lend, the NLA continues to register titles, and sellers who are motivated are finding buyers who, while more patient than their predecessors in 2004 and 2005, are still present and still capable of completing. What has changed is the velocity and the negotiating dynamic. Properties that would have attracted offers within days in 2005 are now sitting for several weeks. Vendors who tested the market at prices above their realistic expectation in 2005 are finding that the second quarter of 2007 is not the market for that experiment. The election is performing the role that political transitions always perform in Jamaica’s property history: it is separating discretionary vendors from motivated ones and discretionary buyers from committed ones.
The political landscape itself has clarified in ways that the property market finds partially reassuring. The Jamaica Labour Party, under Bruce Golding, has moved away from the more radical positions it occupied in the years before his departure to the National Democratic Movement, and the policy commitments it is placing before voters include commitments to fiscal management that would, if maintained in office, not dramatically alter the economic framework that the property recovery has required. The PNP, under Portia Simpson-Miller, is contesting the election on its record — the Highway 2000, the NLA, the improvement in title registration, the gradual reduction of commercial lending rates — and on the social investments that her political identity demands. Neither party, in its June positioning, is proposing the kind of fiscal adventurism that would reprice J$-denominated assets. The market’s pre-election pause is, in this reading, more about process than about substance — about the uncertainty inherent in any election rather than about the policy content of the probable outcomes.
The global story is harder to read with the same equanimity. The collapse of two Bear Stearns hedge funds in June, each of them heavily exposed to collateralised debt obligations backed by American subprime mortgages, has crystallised a risk that financial markets had been pricing with increasing unease since the beginning of the year. The mechanism is one that Jamaica did not build and cannot now dismantle: the world’s major financial institutions have, over the past decade, packaged American mortgage debt into instruments that were then sold to investors globally, and the unravelling of those instruments is exposing the degree to which credit risk had been obscured rather than eliminated in its transit through the securitisation process. The institutions that bought these products are now marking them down, and the process of discovering exactly how much they are worth is the defining financial story of 2007.
Jamaica’s domestic mortgage market is, as it has been, largely insulated from this mechanism. The NHT does not securitise its portfolio. Commercial bank mortgage lending in Jamaica is funded through domestic deposits rather than through the capital markets instruments that have proven so vulnerable in the American context. The immediate structural risk is low. The indirect risk, however, runs through two channels that the island cannot control. The first is remittances: the United States hosts the largest part of the Jamaican diaspora, and if American employers begin to shed workers in response to financial sector losses and their knock-on effects, the remittance flow that supports a significant portion of Jamaica’s mid-range residential purchases will feel it. The second is the cost of external financing: as global risk appetite deteriorates, the spread that Jamaica must pay on international bond issuance — and the government needs external financing to manage its debt profile — will widen.
Against this complicated background, the Falmouth Pier development stands out as the property market’s clearest near-term growth story. Confirmed, funded, and sufficiently advanced that the construction timeline is visible, it is attracting the kind of pre-event land positioning that the Highway 2000 and Portmore Causeway attracted before their respective openings. The Falmouth story is more modest in scale — it concerns a specific stretch of coastline and a specific category of commercial and hospitality development rather than the metropolitan transformation that the road projects delivered — but within its bounds it is generating the sustained investor interest that marks a genuine value thesis rather than speculation on an uncertain outcome.
What This Means
The second half of 2007 will be defined by two events that Jamaica cannot fully control: its own election and the global financial system’s continuing reckoning with the consequences of American subprime. On the election, the most plausible scenarios point toward continuity on fiscal policy regardless of outcome, which means the property market’s post-election recovery should be reasonably swift once the result is known. On the global financial stress, the range of outcomes is wider and the Caribbean island that stands to be most affected is not the one with the most sophisticated financial sector but the one most dependent on remittances from the affected economies — and Jamaica, at US$1.8 billion annually, is conspicuously exposed. The property market’s best outcome over the next twelve months is one in which the election produces a clear result quickly, global financial stress remains contained to financial markets without generating the economic recession that would reduce American household incomes, and the Bank of Jamaica finds one more notch of room to ease lending rates toward the level where the market can broaden its participation base. All three of these things are possible. None of them is certain.
Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomesnews Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com
Visit our YouTube Community ↗