Budget Season Arrives: Jamaica’s Housing Sector Awaits Policy Clarity Amid Global Stress — March 2008

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

Month in Brief

• The US Federal Reserve cut rates by a further 50 basis points at its January meeting and markets are pricing in additional cuts; the cumulative easing since September 2007 has been extraordinary in scale, yet US economic data continues to deteriorate with housing starts and employment both weakening.
• Global financial markets remain volatile through February, with credit default swap spreads on major banks widening and structured credit markets showing continued distress; the full scope of subprime-related losses across the global banking system is still being established.
• Jamaica’s Golding government is expected to present its 2008–2009 budget within weeks; housing sector stakeholders are awaiting the NHT reform measures that were central to the JLP’s election platform and the government’s first six months of policy work.
• Oil prices have risen above US$100 per barrel again through February and are now trading near multi-year record highs; Jamaica’s energy import bill and construction cost environment face sustained pressure.
• The Jamaican dollar has continued to edge weaker, trading near J$77–78 to the US dollar; the Bank of Jamaica has been managing the rate with moderate intervention to prevent disorderly depreciation.
• Jamaica’s winter tourism season is concluding; early indications are that North American arrivals were adequate but that hotel occupancy rates were softer than the previous winter, consistent with US consumer caution.

Housing Market Overview

Jamaica’s property market enters March 2008 in a posture that has become familiar over the past six months: structurally sound, fundamentally undersupplied, and currently in a period of constrained transaction activity driven by external uncertainty and domestic financing conditions that have not improved. Six months of global financial turbulence, an unchanged domestic rate environment, and the lingering question of NHT reform have combined to keep the mid-market in a holding pattern that the budget season may now begin to resolve.

February transaction data from Kingston estate agents and the north coast resort markets tells a consistent story: enquiry volumes are maintained, buyer intent is genuine, but conversion rates — the proportion of enquiries that progress to offers and completions — remain below historical norms. The buyers who are transacting are doing so for compelling personal reasons: a specific need to relocate, a long-planned family land purchase, or a return from overseas with capital already committed. Speculative or purely investment-driven transactions have become rare.

In the upper residential market, some of Kingston’s most sought-after addresses — Norbrook, Cherry Gardens, Jacks Hill, and the gated communities on the eastern fringes of the metropolitan area — have seen prices hold remarkably firm. Vendors at this tier have the financial resilience to wait, and buyers who want these properties accept that they will not be acquired at distressed prices. This segment functions as a near-luxury market with its own dynamics, largely insulated from the pressures affecting the accessible market below.

The affordable and mid-market segment — by far the largest in terms of the number of Jamaican households it serves — is where the policy stakes are highest and the current environment is most challenging. This is the segment that depends on NHT financing, that is most affected by construction cost inflation, and that would most directly benefit from the government’s reform agenda if it delivers.

Government Policy: The Budget Moment

The Golding government’s 2008–2009 budget is the single most important near-term event for Jamaica’s housing market. It is the moment at which six months of policy review and political commitment must translate into numbers — and numbers are the language in which policy intent is ultimately tested.

The housing community is watching for four specific things in the budget: first, the level of NHT contribution to the Consolidated Fund, and whether the incoming government has found the fiscal space to reduce it relative to previous years; second, any revision to NHT maximum loan amounts, which have not kept pace with construction cost inflation and have allowed the gap between what NHT-eligible buyers can borrow and what decent new units cost to widen uncomfortably; third, any revision to the interest rate structure for NHT loans, particularly for the lower-income contributor tiers where the current rates are still a significant burden; and fourth, any new government housing supply commitments — sites, project numbers, unit targets — that would signal a credible programme of affordable unit delivery.

The fiscal challenge for the government is real. A US economy that is, by most indicators, in recession, is already beginning to feed through to Jamaica’s tourism receipts and bauxite revenues. A tighter revenue envelope makes fiscal transfers to housing-related spending more costly in opportunity terms. The government’s advisers will be aware that any housing commitments made in this budget will be delivered against an external backdrop that is less benign than was hoped when the campaign was fought six months ago.

Nevertheless, the imperative for action is strong. The NHT reform commitment is not a peripheral policy aspiration; it is a central political promise that a significant portion of the electorate voted for in August 2007. Deferral without explanation would disappoint voters and, more practically, would leave the Trust’s hundreds of thousands of waiting contributors in the same constrained position they have occupied for years.

The Global Credit Environment: Six Months On

It is now six months since the credit market disruption that began in August 2007 forced central banks on both sides of the Atlantic into extraordinary policy responses. The Federal Reserve has cut its target rate from 5.25 per cent to 3 per cent in that period and is expected to cut further. The Bank of England has begun easing. Yet despite this significant monetary stimulus, global credit conditions remain significantly tighter than they were before the crisis began.

The reason is that the problem is not primarily one of price — it is one of confidence and counterparty risk. Banks that are uncertain about the extent of their own losses, or the losses of their counterparties, are reducing lending and risk exposure regardless of what the policy rate is. This is the mechanism through which financial crises resist monetary policy stimulus, and it is why thoughtful observers are not yet confident that the Fed’s rate cuts will produce a quick resolution.

The implications for Jamaica flow primarily through the real economy rather than through direct financial system linkages. Jamaica’s banks are not significantly exposed to US subprime paper or structured credit products. What they are exposed to is the broader deterioration in global economic conditions that the credit crisis is producing. Tourism revenues, remittances, bauxite earnings, and the government’s external borrowing costs are all affected by the quality of global economic conditions.

On the exchange rate, the continued weakness of the US dollar against major currencies provides some offset: a weaker dollar means that dollar-denominated tourist spending goes slightly further in Jamaica, and that the Jamaican dollar does not need to depreciate as sharply against sterling or the euro to maintain competitive balance in key source markets. This is a modest positive within an otherwise challenging external picture.

Construction Sector

The construction sector in February has been characterised by the same cautious consolidation that has defined it since the fourth quarter of 2007. Active projects are progressing, but the pipeline of new project commencements is thin. Oil above US$100 per barrel has kept material costs at levels that challenge the viability of affordable housing projects, and the uncertainty about NHT policy has made developers unwilling to commit to schemes whose financial model depends on NHT-eligible buyers being able to access adequate financing.

The budget, if it delivers on NHT reform, could provide a significant catalyst for new affordable housing project launches in the second half of the year. A meaningful increase in NHT loan limits, for instance, would immediately improve the arithmetic on schemes that are currently not viable because the gap between unit cost and maximum NHT loan is too wide. Developers who have schemes in design or preconstruction and who are waiting for this signal would be in a position to move relatively quickly.

Construction costs show no sign of easing in the near term. The commodity price environment — driven by continued strong demand from China and other emerging markets — is sustaining steel and cement prices at levels that have become the new operating reality for Jamaican contractors. Project budgets prepared at pre-2007 cost assumptions are in most cases not viable without revision, and this process of budget reset is a necessary precondition for project viability in the current environment.

Investment Climate

The investment climate for Jamaican property in March 2008 is one of selective patience. The structural appeal of Jamaican real estate — limited urban land supply, persistent demand, stable title framework, and a cultural connection to the island that sustains diaspora demand across economic cycles — has not changed. What has changed is the external credit environment that enables a portion of that demand to express itself as actual transactions.

Institutional investors with long time horizons are viewing the current period as one to hold and maintain rather than to add aggressively. Domestic pension funds and insurance companies with property mandates continue to participate in the market at a level consistent with their asset allocation targets. The private equity and speculative categories of buyer are less visible than at the peak of the cycle.

For individual investors, particularly diaspora Jamaicans with capital saved specifically for a Jamaican property acquisition, the current environment offers reasonable entry conditions in the accessible mid-market. Vendors are generally open to price negotiation that would not have been possible twelve months ago, and the pipeline of competition from other buyers has thinned. Patient investors who have been waiting for the right property at a sensible price may find that 2008 offers more opportunities than 2006 or 2007 did.

Diaspora Perspective

The end of the winter tourist season provides a natural moment to assess the condition of Jamaica’s diaspora property market. February and early March see the departure of the majority of diaspora visitors who spent the Christmas and New Year period in Jamaica, and the estate agencies and solicitors who serve this market are now able to count the transactions that resulted.

By the accounts of professionals in this space, the December 2007–February 2008 diaspora season produced fewer completed transactions than in comparable periods of 2005 and 2006, but the gap is not as wide as the scale of global financial disruption might have suggested. The Jamaican diaspora’s attachment to homeland property is deep and persistent, and the families that came home with a specific acquisition mandate — land for a retirement house, a family home, a plot in the family district — completed those transactions. Discretionary and speculative buyers were more circumspect, but they were not entirely absent.

Remittance data through January and February remains reasonably robust. The employment profile of the UK and US diaspora communities — concentrated in sectors that have so far been relatively insulated from the worst of the economic slowdown — continues to support household income levels that sustain both family support remittances and the modest discretionary flows that underpin property market participation.

Affordability

The affordability equation at the start of March 2008 can be stated with uncomfortable precision: a Jamaican household earning the median formal-sector income faces commercial mortgage rates of 14–17 per cent on a product that requires a deposit of at least 10–20 per cent of the property value. At these rates, the maximum loan serviceable on median income finances a property worth considerably less than the cost of a newly built modest family home in the Kingston commuter belt or in most resort parishes.

NHT lending is the mechanism that bridges this gap for the majority of working Jamaicans who eventually access homeownership. The Trust’s rates — 0–5 per cent depending on income tier — are vastly more accessible than commercial alternatives, and its loan limits define the ceiling of what NHT-backed buyers can pay. If those limits are raised in the budget, the affordable market expands; if they are not, the current constraint persists.

Oil above US$100 per barrel adds another dimension: construction costs that were already running ahead of NHT loan limits have moved further ahead. The arithmetic of affordable housing delivery — building a unit at a cost that a NHT-eligible buyer can afford — requires either that the NHT loan limit rises, or that construction costs fall, or that some form of subsidy bridges the gap. The budget will reveal which of these levers the government intends to pull.

Looking Ahead

April will bring the government’s 2008–2009 budget and the clearest signal yet of whether Jamaica’s housing reform agenda is moving from commitment to action. For a market that has been patient through a long period of uncertainty, the budget represents the moment when patience is either rewarded with progress or extended by deferral.

On the global front, the pace of US economic deterioration will continue to be the dominant external variable. The Federal Reserve’s rate cuts are working their way through the economy, but the lags are long, and the structural problem of housing sector oversupply and credit tightening is not quickly resolved by lower overnight rates. Jamaica should plan for an external environment that remains challenging through the middle of the year at minimum.

For investors and homeowners, the message of this edition is one of engaged patience: the fundamentals of Jamaica’s housing market are intact, the policy environment is being renegotiated in a direction that should eventually improve affordability, and the external pressures that are currently constraining activity are cyclical rather than structural. The market will reward those who understand the difference between a temporary constraint and a permanent change — and who position themselves accordingly for the conditions that will prevail when the current cycle turns.