Dow Records and Credit Fears: Jamaica Monitors Global Turbulence — November 2007

Publication Date: November 3, 2007 | Coverage Period: October 3–November 2, 2007 | Category: Monthly Review

Month in Brief

• The Dow Jones Industrial Average touched an all-time record above 14,000 in mid-October before retreating sharply on renewed credit-related concerns, illustrating the schizophrenic mood now pervading global financial markets.
• US subprime mortgage losses are spreading beyond their original locus, with major international banks disclosing write-downs that are larger than markets had anticipated; the scale of the problem is still being mapped.
• The Federal Reserve cut its target rate by 25 basis points in October, following a 50 basis point cut in September, signalling that the world’s most important central bank is now in active defensive mode.
• The Bank of Jamaica held its key policy rate broadly steady, watching the external environment and prioritising exchange rate stability as the primary anchor of domestic monetary policy.
• Oil prices have continued their remarkable climb, with West Texas Intermediate approaching US$90 per barrel by late October — a level that is feeding directly into Jamaica’s fuel import bill and construction input costs.
• The Golding government’s NHT review continues; no formal legislative proposals have yet been tabled, though the Ministry has indicated that a report to Cabinet is in preparation.

Housing Market Overview

Jamaica’s property market entered November in a posture that might best be described as disciplined restraint. The drama in global financial markets — record highs giving way to sharp falls, banks announcing write-downs, the Fed cutting rates — has not translated into any immediate dislocation in Jamaican real estate. But the attentive market participant understands that the absence of immediate impact does not mean the absence of impact; the transmission is slow, not absent.

Transaction activity in October was characterised by a continuing softness at the mid-market level and a more resilient upper end. The pattern is now consistent enough across consecutive months to be described as a structural feature of the current environment rather than a seasonal anomaly. Buyers who need to borrow domestically are constrained by rates; buyers with equity or offshore credit access are active.

In the Kingston metropolitan area, new listing volumes have been modest. Vendors who came to market in the pre-election period and did not transact are, in a number of cases, withdrawing listings and waiting rather than reducing prices. This price stickiness is a feature of Jamaican residential property markets that has been observed in previous periods of uncertainty; it keeps headline price indices relatively stable while actual transaction volumes soften underneath.

The north coast resort market — Montego Bay, Ocho Rios, Runaway Bay — is entering its seasonal high period as North American and European visitors and buyers begin to engage with the winter season. Resort-linked real estate enquiries typically lift in the October–December period, and early signals from developers and agents suggest this year’s seasonal pickup is occurring, if at a more measured pace than 2006.

Government Policy

Two months into the Golding administration, the housing policy landscape is beginning to take clearer shape even if formal legislative action has not yet materialised. The Ministry responsible for housing has been mapping the existing NHT project pipeline, conducting the review of Consolidated Fund transfers that the Prime Minister pledged, and consulting with private sector developers on the regulatory barriers that most impede affordable unit delivery.

The outcomes of these processes — in the form of Cabinet papers, budget allocations, and potentially legislative amendments — are expected to become visible in the new year, when the budget cycle for 2008–2009 will force decisions. The constraint that the policy team faces is the same one that confronted the previous government: Jamaica’s fiscal position leaves limited room for new spending commitments, and any reduction in NHT transfers to the Consolidated Fund must be offset somewhere.

There has been constructive early movement on the planning and approvals side. The administration has signalled its intention to reduce the average time taken to obtain development approval from parish councils and the National Environment and Planning Agency. For developers, this is a meaningful commitment — delays in approvals are a well-documented source of cost escalation on residential projects, and any measurable improvement in processing times would be welcomed.

The Global Credit Story: Where Are We Now?

The credit market deterioration that began with US subprime mortgage delinquencies in early 2007 has by October extended well beyond its origins. Major financial institutions — Citigroup, Merrill Lynch, UBS, and others — have disclosed tens of billions of dollars in write-downs related to structured credit products tied to US mortgage collateral. The write-downs are still being counted; the sense among market observers is that the full extent of losses has not yet been disclosed.

The Federal Reserve’s two rate cuts in September and October reflect the seriousness with which the US central bank views these developments. The Fed is attempting to balance two risks: credit tightening that could slow the US economy into recession on one side; inflation from high oil and commodity prices on the other. It has chosen, for now, to prioritise economic support over inflation control — a judgement that not all observers consider correct.

For Jamaica, the key transmission channels are: first, the impact on US economic growth and hence on North American tourist arrivals and diaspora incomes; second, the impact on global credit conditions and hence on Jamaica’s own access to external financing; and third, the impact on oil and commodity prices, which remain elevated and continue to feed into domestic inflation and construction costs. None of these channels is showing acute stress yet, but all three bear careful monitoring.

Construction Sector

The construction sector in October has been characterised by high material costs, a moderate pipeline of active projects, and a cautious attitude toward new project launches. Oil at or near US$90 per barrel has particular resonance in Jamaica’s construction industry because it affects not just transport costs but the cost of steel production, plastic components, and certain chemical inputs to cement.

Developers with projects in construction are managing these pressures through a combination of specification adjustments, negotiation with suppliers, and, in some cases, revised unit pricing that reflects the cost environment. The risk is that upward price revisions push units beyond the reach of their intended buyers, creating a mismatch that undermines project viability. This is a particular concern at the affordable end of the market where NHT financing is the primary buyer mechanism and NHT loan limits constrain the maximum price buyers can pay.

The government’s announced priority on housing is expected to generate some new public sector construction activity in the coming year, which will provide some stimulus to the industry pipeline. However, the pace at which public housing projects can be mobilised from concept to sod-turning should not be overstated; the institutional and procurement processes involved are not quick even under a motivated administration.

Investment Climate

The investment climate for Jamaican real estate remains positive at the upper tier and cautious below it. Foreign buyers with clean credit profiles and dollar-denominated funds continue to find Jamaica attractive relative to other Caribbean destinations — the combination of infrastructure, culture, international airlift, and price-per-square-foot compares favourably with Barbados, the Cayman Islands, and parts of the Bahamas.

Domestic institutional investors — pension funds, insurance companies — continue to show interest in commercial and residential development as an asset class that provides inflation protection in a high-rate environment. The challenge is deal structuring: finding returns that work at Jamaican construction costs and rental yields while still pencilling out against fixed-income alternatives that offer double-digit yields without construction risk.

Diaspora Perspective

Diaspora investors in Jamaica’s property market are navigating a more complex environment than they faced twelve months ago. UK-based investors are watching the aftermath of the Northern Rock crisis and a UK housing market that, while not yet in the sharp correction that has afflicted the US, is showing signs of cooling from its multi-year boom. US-based investors are managing the consequences of the subprime crisis directly if they own US residential property, which constrains their liquidity for offshore investments.

Despite this, remittance flows to Jamaica have not materially declined, suggesting that the employment base of the Jamaican diaspora — which is concentrated in relatively stable sectors in the UK and the US — has not yet been meaningfully affected by the financial market turbulence. The diaspora labour market is a lagging indicator; financial market stress leads employment effects by six to twelve months in most historical cycles.

Affordability

Affordability for Jamaican households buying their first home has, if anything, worsened slightly in October relative to the position at mid-year. Construction cost increases have pushed up the price of new units; commercial mortgage rates have not declined; the NHT loan limits have not been revised upward. The result is that the gap between what an NHT-eligible buyer can access and what a new affordable unit costs has, in some schemes, widened slightly.

The government’s review of the NHT framework is therefore not merely a political commitment; it is a mathematical necessity if the Trust is to remain the primary vehicle for working-class homeownership in Jamaica. The variables that need to move — maximum loan amounts, interest rate tiers, contribution thresholds — are all within the policy control of the new government and the NHT board. Movement on any of them would provide immediate relief to buyers at the lower end.

Looking Ahead

December will bring the end of 2007 and what is already being described, in some quarters, as one of the most consequential years in global financial history. Jamaica enters the final month of the year with its economy still growing, its housing market broadly stable, and its new government still in the early phases of policy implementation. The external headwinds are building, but they have not yet reached domestic shores with disruptive force.

The question for 2008 is whether the global credit correction will deepen or stabilise. If the Fed’s rate cuts prove sufficient to engineer a soft landing for the US economy, the knock-on effects for Jamaica — through tourism, remittances, and credit conditions — will be manageable. If the correction deepens and the US enters a sustained contraction, the picture for Jamaica becomes considerably more difficult to navigate. The next edition will be watching for early signals of which scenario is unfolding.