Year-End Reckoning: Jamaica’s Housing Sector Faces 2008 with Caution — December 2007

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

Month in Brief

• US economic data for November points to a significant slowing in activity, with housing starts and building permits at multi-year lows; the probability of a US contraction in the near term is now being openly discussed by mainstream economists.
• The Federal Reserve is expected to cut rates again in December as it attempts to prevent the credit market freeze from becoming a broader economic recession; credit conditions globally remain severely impaired.
• Jamaica’s own economic performance in 2007 has been modestly positive, with GDP growth estimated at around 1.5–2 per cent for the year, though the trajectory for 2008 looks more challenging as external headwinds intensify.
• The Golding government is preparing its first full budget for 2008–2009, and housing sector participants are expecting to learn more about the NHT Consolidated Fund transfer question in the coming budget cycle.
• Oil prices remain near US$90 per barrel, sustaining elevated construction costs; the Jamaican dollar has traded near J$74–75 to the US dollar through November, showing some marginal depreciation pressure.
• The annual December peak in diaspora visits to Jamaica — the “barrel season” and homecoming period — is expected to maintain remittance flows at seasonally elevated levels despite the broader global anxiety.

Housing Market Overview

Jamaica’s residential property market closes out 2007 in a state that its more experienced participants describe as fundamentally sound but increasingly tested by external forces. The year began with an active market, modest transaction volumes, and an optimistic outlook supported by positive global growth expectations. It ends with a new government, a global credit crisis of uncertain depth, oil near US$90 per barrel, and an external environment that has deteriorated markedly in twelve months.

Domestic demand for housing — the underlying need for shelter, the NHT waiting lists, the aspirations of working Jamaican families — has not changed. What has changed is the capacity of the financial system to intermediate that demand into actual transactions. High commercial rates, a constrained NHT, rising construction costs, and now a global environment that is less hospitable to capital flows have all combined to make the gap between housing need and housing delivery wider at year-end than it was at year-start.

In the Kingston metropolitan area, estate agents report that November was characterised by a flurry of year-end transaction activity as buyers and sellers who had been waiting through the uncertainty of the post-election period moved to conclude business before the holidays. This seasonal pickup is not unusual, but its intensity has been slightly below the levels of previous years, consistent with the more cautious mood that has pervaded the market since September.

The resort market on the north coast is entering its peak winter season. Tourist arrivals through October were respectable, and early bookings for the December–March high season suggest that the US economic slowdown has not yet materially dented demand for Caribbean holidays among American travellers. This is an important buffer for Jamaica — tourism revenues support the exchange rate, employment, and indirectly the capacity of Jamaicans in the hospitality sector to service their household financial obligations including mortgages.

Government Policy: Budget Season Approaches

The Golding administration is now three months into office and the immediate priorities for housing policy are becoming clearer, even if formal decisions have not yet been announced. The budget preparation cycle for 2008–2009 is under way, and it is during this process that the most consequential housing-related decisions will be made.

The central question — the future of NHT transfers to the Consolidated Fund — has been complicated by the external economic outlook. If global conditions continue to deteriorate and Jamaica’s growth slows in 2008, the government’s fiscal position may tighten, making it more difficult to absorb any reduction in NHT inflows. The Ministry of Finance and the NHT are understood to be working through scenarios that balance the housing reform commitments with fiscal sustainability.

What the government can do without fiscal cost is reform the approvals process, and there are indications that movement on this front may come early in the new year. Streamlined processing at the National Environment and Planning Agency and at the parish council level would accelerate the delivery of new housing supply at no direct cost to the Treasury. This is the low-hanging fruit of housing policy reform, and it would be a meaningful early win for the new administration.

The US Economic Picture: Watching the Transmission

The US economic situation has deteriorated materially through November. Housing starts have fallen to their lowest levels in more than a decade. House prices in major US metropolitan markets are declining on a year-over-year basis for the first time in the post-war period. Credit standards for mortgages have tightened sharply, and lenders who were aggressively expanding their books twelve months ago are now in survival mode.

The Federal Reserve has cut rates three times since September and is expected to cut again in December. The question is whether rate cuts can counteract the self-reinforcing dynamic of falling house prices, rising defaults, tightening credit, and weakening consumer confidence. Some economists believe the Fed is behind the curve; others believe the cuts will, in time, provide sufficient stimulus. The honest answer is that nobody knows with confidence how this resolves.

For Jamaica, the US situation matters through several channels: the North American tourist market; the employment and income of the US-based Jamaican diaspora; the exchange rate dynamics of a US dollar that is weakening against major currencies; and the broader global credit conditions that affect Jamaica’s access to external financing. None of these has yet delivered a sharp blow to the Jamaican economy, but each channel represents a vulnerability that is now more exposed than it was at the start of the year.

Construction Sector

Jamaica’s construction sector closes out 2007 with a pipeline that is active but not buoyant. The residential development projects that were launched in 2006 and early 2007 under more optimistic market conditions are now reaching delivery phases in a more challenging cost environment than was anticipated at inception. Material cost overruns are common, and some developers are navigating difficult conversations with their financial backers about project viability.

New project launches for 2008 are being approached with considerably more caution. Developers who were considering new affordable housing schemes are watching the NHT policy environment; those in the upper market are monitoring credit conditions and buyer sentiment. The pipeline of new supply coming to market in 2008 is likely to be thinner than in recent years, which in a context of sustained underlying demand has mixed implications: it supports pricing but does nothing to address the fundamental supply deficit.

Investment Climate

The investment climate for Jamaican real estate has become more selective as 2007 concludes. The category of investor that was financing Caribbean second-home purchases with US home equity lines of credit — a meaningful segment of the north coast buyer pool in the boom years — has been largely eliminated by falling US house prices and tightening lending standards. Buyers who remain active are those with genuine liquidity: cash buyers, offshore-financed purchases, and buyers whose US property equity has been protected by location or quality.

The domestic investment story is more stable. Jamaican institutional investors continue to regard property as a core asset class, and individual investors with capital to deploy face a market in which vendor expectations have not yet adjusted sharply downward, creating the conditions for patient negotiation rather than opportunistic acquisition. The time for distressed buying in Jamaica’s residential market has not yet arrived, if it comes at all.

Diaspora Perspective

December is traditionally the month in which Jamaica’s diaspora connection is most visible and economically significant. The annual homecoming — Jamaicans from the UK, the US, and Canada returning to spend the Christmas holiday period — generates significant retail activity, hospitality revenues, and, for the real estate market, a concentration of property decisions. Estate agents in Kingston and the parish capitals report that diaspora visitors in December account for a disproportionate share of annual property enquiries and transactions.

This year’s homecoming season proceeds against a backdrop of greater financial anxiety in the diaspora’s home countries than has been the case in recent years. UK-based Jamaicans are navigating the aftermath of the Northern Rock episode and a cooling housing market; US-based Jamaicans are more directly affected by the subprime crisis and may have experienced falls in the value of US property they own. Both groups will be making their December Jamaica real estate decisions with more circumspection than in previous cycles.

Remittances have held up through November and are expected to be seasonally elevated in December. The structural resilience of remittance flows — driven by the deep family and community bonds that connect diaspora Jamaicans to their home island — means that property transfer decisions and discretionary luxury purchases are more affected than routine family support flows.

Affordability

The affordability situation at year-end is essentially unchanged from the position that has prevailed throughout 2007: commercial mortgage rates of 14–17 per cent make bank-financed homeownership inaccessible for the median Jamaican household, NHT lending is the primary mechanism for working-class homeownership, and the gap between NHT loan limits and the cost of a decent new unit has narrowed to a point where many schemes are not viable at the prices NHT borrowers can pay.

The new government’s budget for 2008–2009 is the first real opportunity to address this. A decision to increase NHT loan limits, revise interest rate tiers for lower-income contributors, or reduce the Consolidated Fund transfer would all improve the affordability mathematics. The question is whether fiscal space exists to make these moves and whether the new government will prioritise them against competing budget pressures.

Looking Ahead

2008 begins with more questions than certainties. Whether the US achieves a soft landing or enters a more sustained contraction; whether global credit markets stabilise or deteriorate further; whether oil prices remain elevated or ease as demand growth slows; whether the Golding government’s budget delivers on its housing commitments — all of these will determine the operating environment for Jamaica’s property market in the year ahead.

What is clear is that Jamaica enters 2008 with better political direction in housing than it had at the start of 2007, with a government that has made housing reform a stated priority and an NHT that is under active policy review. The external environment has simultaneously become more challenging. How those two forces — positive domestic policy intent versus deteriorating external conditions — interact will be the defining story of Jamaica’s housing market in 2008.

Investors and homeowners are advised to approach 2008 with a long-term perspective, to resist the temptation to time the market on the basis of global financial headlines, and to focus on the enduring fundamentals of Jamaica’s housing market: persistent undersupply relative to underlying demand, a large pool of motivated buyers waiting for conditions that allow them to transact, and a new government that has staked political credibility on improving those conditions.