Oil crossed one hundred dollars a barrel in January. That single fact tells a significant portion of the story that Jamaica’s property market will be working through across 2008. The island imports all of its petroleum, uses it for electricity generation at a cost that feeds directly into every business and household’s monthly outgoings, and is already running annual inflation that has climbed back above double digits after several years of gradual improvement. The property market, which has spent five years navigating its way back from FINSAC’s ruin, is now navigating something different: an external cost shock that it did not cause and cannot avoid.
Highlights
- Oil crosses US$100/barrel in January; Jamaica electricity and transport costs surge
- Jamaica inflation returns to 14-16% range, reversing gains of 2006-2007
- BOJ forced to raise repo rate; commercial lending rates rise back toward 16-17%
- Diaspora remittances decline as US construction sector shedding Jamaican workers
- Golding government’s 2008/09 Budget under severe pressure from rising energy import bill
- Property transactions slowing but NHT cushions impact for its contributor base
The mechanism by which an oil price spike enters Jamaica’s property market is indirect but powerful. It begins with electricity: the island’s power sector remains heavily dependent on imported fuel oil, and a sustained rise in global petroleum prices translates within months into higher electricity tariffs for every household and business in Jamaica. Those higher tariffs reduce disposable income, tighten household budgets, and make the monthly outgoing associated with property ownership — mortgage repayments, maintenance, insurance, utilities — harder to sustain. For the households at the margin of NHT affordability, the squeeze can be decisive. For the developers who are building the corridor schemes that Highway 2000 made possible, higher energy costs add to construction budgets and extend payback timelines.
The Bank of Jamaica’s progress toward lower inflation, which had brought the twelve-month rate from nearly thirteen percent at end-2005 toward eight to nine percent by mid-2007, has been reversed. Commodity-driven cost pressures — not just oil but food, fertiliser, and building materials, all of which move with global commodity indices — have pushed inflation back above twelve percent and are carrying it toward fifteen percent through the first quarter. The central bank faces the dilemma that commodity inflation creates for monetary policymakers: the inflation is not being driven by domestic demand that tighter money could reduce, but by imported cost pressures that interest rate rises will not cure. Nevertheless, the BOJ cannot allow a wage-price spiral to develop, and the repo rate has been edged upward from the eleven to eleven-and-a-half percent range of late 2007. Commercial bank lending rates are tracking back toward the sixteen to seventeen percent range that characterised the early years of the recovery, reversing the easing that had been one of the market’s genuine structural improvements.
Golding’s first full Budget, being prepared for presentation in May, will be framed by an energy import bill that has grown sharply in the months since the government took office. The primary surplus commitment remains in place, but the cost of maintaining it has risen: higher energy imports mean a wider current account deficit that requires external financing at precisely the moment when global financial markets are least willing to provide it generously. The credit default swap spreads on Jamaican sovereign debt — the market’s measure of Jamaica’s credit risk — have widened materially since the fourth quarter, reflecting both the deteriorating global risk environment and the legitimate concern that Jamaica’s fiscal position is more vulnerable to external shocks than it appeared during the improvement years of 2004 through 2006.
Diaspora remittances, already showing deceleration in the second half of 2007, are declining more clearly through the first quarter of 2008. The American construction sector, which employs a disproportionately large share of the Jamaican diaspora, is shedding workers as the housing bust deepens, and the hospitality sector that employs many of the rest is beginning to register the spending reductions of an American household under financial pressure. Remittance flows to Jamaica typically lag the American labour market by two to four months, and the data for January through March suggests that the lag has worked through: what arrives in Jamaica in the first quarter of 2008 reflects the American employment conditions of the fourth quarter of 2007, which were already deteriorating.
The property market’s response to this convergence of pressures is visible in transaction velocity more than in prices. Values in prime Kingston and St. Andrew have not fallen; the supply of properties at current valuations remains manageable, and there is no sign of the kind of distressed selling that produces rapid price corrections. But the pace of transactions has slowed from the already moderated pace of 2006 and 2007, and the time between listing and agreement has extended. The NHT continues to lend, and its counter-cyclical role has never been more visible: the Trust’s first-quarter disbursements, funded by the steady inflow of payroll contributions, represent the stable floor under a market that would otherwise be entirely subject to the credit tightening that the BOJ’s rate reversal implies.
In the corridor developments along Highway 2000, the impact is sharper. The developers who committed to land purchases and subdivision infrastructure in 2005 and 2006, when rates were falling and the post-causeway outlook was optimistic, are now completing schemes into a market where the buyer’s NHT allocation is less valuable in real terms — because prices have risen faster than the ceiling adjustments — and where the commercial lending complement to NHT finance has become more expensive. The schemes are not failing, but their pre-sales are slower and their developers’ patience is being tested in ways that the projections from three years ago did not foresee.
What This Means
The first quarter of 2008 has demonstrated, with an efficiency that economic conditions rarely achieve, exactly how exposed Jamaica’s property market is to the conjunction of external commodity prices, global financial conditions, and the domestic monetary response they force. The market is not in distress, but it is in a condition that would have seemed improbable during the optimism of 2004 and 2005: prices stable but transaction velocity declining, lending rates rising rather than falling, remittances decelerating, and the global environment deteriorating in ways that have not yet produced their full Jamaica-specific impact. Over the next six to eighteen months, the critical variable is not the property market itself but the depth of the American economic slowdown: if the United States enters a severe recession, the remittance channel will close materially, and Jamaica’s property market will face its hardest test since the FINSAC recovery began.
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