Credit Storm Deepens: Jamaica Holds Course as US Turbulence Spreads — February 2008

Publication Date: February 3, 2008 | Coverage Period: January 3–February 2, 2008 | Category: Monthly Review

Month in Brief

• The US Federal Reserve made an emergency inter-meeting rate cut of 75 basis points on January 22, the largest single cut in more than two decades, followed by a further 50 basis point reduction at its scheduled January 30 meeting — signalling acute concern about the US economic trajectory.
• US GDP growth for the fourth quarter of 2007 came in at a sharply reduced rate, and a growing number of economists are now openly forecasting that the US entered recession in late 2007 or early 2008.
• Jamaica’s tourism winter season is progressing with adequate but not exceptional North American arrivals; the industry is watching for any softening in forward bookings as US consumer confidence slides.
• The Bank of Jamaica maintained its policy stance in January, prioritising exchange rate stability as the Jamaican dollar edged toward J$76–77 per US dollar under modest depreciation pressure.
• Oil prices retreated slightly from their brief foray above US$100 per barrel but remain above US$90, keeping upward pressure on Jamaica’s import bill and construction costs firmly in place.
• The Golding government’s budget process is advancing; housing sector stakeholders are expecting the NHT review findings to inform budget allocations when the 2008–2009 budget is presented to Parliament.

Housing Market Overview

The January restart of Jamaica’s property market has produced transaction activity that is best described as solid in the premium segment and subdued in the mid-range. The pattern that has defined the market since the third quarter of 2007 — upper-end resilience, mid-market constraint — has continued without material change into the new year. What has changed is the backdrop: the US Federal Reserve’s emergency rate cut on January 22 — the largest in more than twenty years — is not the kind of policy action that conveys reassurance. It conveys urgency, and urgency has a way of sharpening the caution of property buyers everywhere, including Jamaica.

Estate agents across the Kingston metropolitan area and the north coast resort markets report that January enquiry volumes are broadly in line with seasonal norms, but the conversion rate from enquiry to offer has lengthened. Buyers who are not under time pressure are choosing to observe rather than commit, waiting to see whether the global turbulence stabilises before making significant capital commitments. This is a rational response to genuine uncertainty, and the prudent vendor will recognise it as such rather than interpreting hesitation as absence of interest.

The Kingston upper market continues to be the most active price band. Executive homes in Norbrook, Cherry Gardens, and Jack’s Hill — the addresses that attract returning residents, senior professionals, and diaspora buyers with clear property mandates — are transacting at prices that remain close to vendors’ expectations. At this tier, the buyer profile is least dependent on the NHT or on domestic commercial mortgage products, and most insulated from the global credit tightening that is affecting the accessible market below.

Government Policy: Budget Approach

The Golding administration’s housing agenda is entering a critical phase as the 2008–2009 budget takes shape. The Prime Minister’s pre-election commitment to review the NHT’s Consolidated Fund transfers has moved from the campaign trail into the machinery of government, and those within the process report that the review is substantive rather than perfunctory. The question of what conclusions it reaches — and how those conclusions are translated into budget numbers — will be answered in the coming weeks.

The fiscal environment in which the budget is being constructed has become more challenging than it appeared in September 2007 when the new government took office. A US economy that may be entering recession will affect Jamaica’s tax revenues through multiple channels: tourism receipts, bauxite and alumina earnings, and the general level of economic activity all have exposure to North American demand. A tighter fiscal envelope makes it harder — but not impossible — to deliver on housing commitments.

The approach most consistent with both fiscal discipline and housing reform would be a phased reduction in NHT transfers combined with compensating adjustments elsewhere in the budget, alongside an immediate uplift in NHT loan limits that does not require Consolidated Fund relief but can be funded within the Trust’s existing capital base. Whether the government chooses this path or defers the more ambitious reforms to a later budget will be known once the budget is presented.

On the planning and approvals front, early reports from the development sector suggest that the administration’s commitment to faster processing is beginning to generate tangible, if modest, improvements in turnaround times at some parish councils. This is encouraging, and if sustained and replicated across the system, it would provide a meaningful boost to the supply side of the affordable housing equation over the medium term.

The US Economic Situation: Emergency Measures

The Federal Reserve’s decision to cut rates by 75 basis points on January 22 — outside its normally scheduled meeting calendar — was a dramatic departure from its usual approach and signals that the US central bank’s assessment of economic risk has intensified sharply. The move came after sharp falls in global equity markets triggered by concerns about the depth and breadth of the US economic slowdown and its implications for European and emerging market economies.

The subsequent 50 basis point cut on January 30 brought the Fed’s target rate to 3 per cent, down from 5.25 per cent as recently as mid-2007. The cumulative magnitude of these cuts reflects an extraordinary policy response to what the Fed clearly believes is a serious threat to US economic stability.

For Jamaica, the critical question is not whether the Fed is cutting — but whether the cuts will be effective. If they succeed in stabilising the US economy, the knock-on effects for Jamaica’s tourism, remittances, and trade are manageable. If the US has entered a self-reinforcing contraction in which lower rates cannot quickly restore confidence and spending, the external environment for Jamaica will deteriorate further through the course of 2008. The bauxite and alumina sector, which is a significant contributor to Jamaica’s export earnings, is exposed to any slowdown in global industrial demand; and tourism, which employs a large proportion of the Jamaican workforce directly and indirectly, is exposed to US consumer sentiment.

Construction Sector

Jamaica’s construction industry began 2008 with a cautious attitude to new project launches that has characterised the sector since the fourth quarter of last year. Material costs remain elevated: oil above US$90 per barrel, steel and cement prices reflecting both energy costs and sustained demand from other regional markets. The competitive landscape for tendering on residential projects has become more acute as developers have scaled back launch programmes, resulting in greater competition among contractors for the work that is proceeding.

Public sector construction activity — road works, school buildings, and health facilities — has provided some baseline demand for the industry. The government’s housing programme, once operationalised, is expected to add to this baseline, but the procurement and design timelines mean that any meaningful addition to the construction pipeline from government housing projects is unlikely to be felt before the second half of the year at the earliest.

The skilled labour market has shown mixed signals in January. In some trade categories — particularly those where workers have been employed on regional construction projects that are now slowing — availability has improved slightly. In other categories, particularly senior site management and qualified structural engineers, the market remains tight.

Investment Climate

The investment climate for Jamaican real estate in February 2008 is one of patient selectivity. The category of investor most affected by the global credit tightening — North American buyers who were financing Caribbean acquisitions with home equity credit lines or portfolio margin — has largely been priced out of the market by the collapse in US house values and the tightening of US lending standards. What remains is a more austere buyer pool: cash buyers, long-term institutional investors, and diaspora purchasers executing specific family plans.

For vendors and developers, the implication is clear: the days of multiple bids and quick sales at asking price in the accessible market are behind us for the near term. Vendors who need to transact should price to meet the buyer pool that actually exists, not the buyer pool of two years ago. Developers who need to sell units should ensure that their pricing is genuinely aligned with what NHT-eligible buyers can afford and what the commercial mortgage market can support.

Tourism-linked property — the resort apartment and villa category in Montego Bay, Negril, and Ocho Rios — remains the segment most directly exposed to the US economic situation. Investor confidence in this category is linked to rental yields, and rental yields are linked to occupancy rates, which are linked to North American tourism demand. Early winter season occupancy data is adequate, but the forward look for the spring shoulder season is less clear as US consumers reassess discretionary spending.

Diaspora Perspective

The Jamaican diaspora in the United States is navigating an increasingly complicated economic environment. The US housing market decline has affected diaspora households that own US property — either as a primary residence or as an investment — through falls in equity value and, in some cases, through negative equity situations that constrain financial flexibility. The ability of these households to make discretionary capital commitments to Jamaican property has been reduced, in some cases materially.

However, the employment profile of the US-based Jamaican diaspora — concentrated in healthcare, education, government services, and the skilled trades — has so far provided reasonable insulation from the job losses that are beginning to affect more cyclically exposed US sectors. The diaspora labour market, while under greater pressure than twelve months ago, has not yet experienced the kind of employment shock that would cause remittance flows to decline sharply.

UK-based Jamaicans are watching a UK housing market and broader economy that is beginning to show signs of cooling, though the UK situation remains less acute than the US. The Bank of England has begun cutting rates, signalling concern about growth; the UK housing market, while not in the crisis seen across the Atlantic, is showing price softness in many regional markets for the first time in years.

Affordability

The affordability situation in February 2008 is unchanged in its essential parameters: commercial mortgage rates of 14–17 per cent, NHT loan limits that have not kept pace with construction cost inflation, and a rental market in Kingston and urban centres that offers no comfortable alternative. The BOJ’s maintenance of its policy rate stance means that domestic borrowing costs are not following the Fed’s aggressive downward path.

The budget, expected in the spring, remains the clearest near-term opportunity to improve the affordability picture. If the government uses the budget to deliver on even a portion of its NHT reform commitments — higher loan ceilings, revised rate tiers, or a framework for phasing down Consolidated Fund transfers — it will provide meaningful relief to buyers at the lower end of the market and signal to the broader market that the policy direction is moving in the right direction.

Looking Ahead

March will bring the approach of the budget season, further clarity on the US economic trajectory, and the winter tourism season’s closing month. For the housing market, the budget is the dominant near-term event. The indicators to watch are the NHT transfer level, loan limit revisions, and any new housing supply commitments the government makes in its spending estimates.

Globally, the question of whether the Fed’s extraordinary rate cuts can arrest the US economic slowdown will begin to find an answer in the spring economic data. A stabilisation of US conditions would be a significant positive for Jamaica’s external environment; a further deterioration would increase the pressure on tourism revenues, diaspora remittances, and the government’s fiscal position simultaneously.

Jamaica’s property market enters February with the resilience that has characterised it through this difficult period: structural undersupply, persistent underlying demand, and a policy framework that, whatever its current limitations, is being actively reviewed by a government with a genuine mandate for reform. The test of the next few months is whether that review produces action as well as intention.