Bear Stearns and the First Tremors: Jamaica’s Property Market Reads the Warning Signs — April 2008

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

Month in Brief

• Bear Stearns, once among Wall Street’s most formidable investment banks, collapsed and was acquired by JP Morgan Chase on March 14–16 in an emergency rescue brokered by the US Federal Reserve — the most dramatic US financial institution failure since the Depression era.
• The US Federal Reserve cut its benchmark rate aggressively through March, signalling deep concern about systemic risk in global credit markets; the Fed Funds rate now stands at 2.25%, down from 4.25% at the start of 2008.
• Oil prices continued their relentless ascent, crossing US$105 per barrel in March and threatening Jamaica’s import bill with further pressure on the current account deficit.
• Jamaica’s Bank of Jamaica held its benchmark rate in the 11–13% range, maintaining a cautious stance even as the external environment deteriorated; commercial lending rates remained in the 15–18% corridor.
• The Jamaican dollar traded in the J$77–80 per US$ range, with the Bank of Jamaica intervening periodically to arrest depreciation pressure stemming from rising import costs.
• Construction input costs — cement, steel rebar, lumber — continued to climb in line with global commodity inflation, compressing margins for developers and adding to the already difficult affordability equation for first-time buyers.

Housing Market Overview

Jamaica’s residential property market entered the second quarter of 2008 in a state of watchful caution. Transactions in Kingston and St Andrew — the bellwether for the broader market — remained subdued relative to the peaks of 2005–2006, with agents and valuers reporting a notable lengthening in the time properties spend on the market before achieving a sale. The primary constraint is not lack of demand in an absolute sense; population growth, migration patterns, and the enduring aspiration for homeownership sustain underlying interest. Rather, it is the financing gap — the distance between what buyers can borrow at prevailing commercial rates and what properties now cost — that is keeping would-be purchasers on the sidelines.

Commercial bank mortgage rates in the 15–18% range make monthly debt service on even a modestly priced home in a middle-income parish such as St Catherine or Manchester a formidable burden for a household earning at or near the median wage. With no expectation of significant rate reductions in the near term — and with global financial conditions now visibly tightening following the Bear Stearns episode — the market consensus is that financing costs will remain elevated through at least the second half of 2008.

The upper end of the market — properties above J$20 million in the north coast resort corridor and in premium Kingston neighbourhoods — continued to benefit from diaspora interest and from local high-net-worth buyers less dependent on leverage. These segments are not immune to sentiment shifts but are, for now, insulated from the worst of the affordability squeeze.

Government Policy and the NHT

The National Housing Trust remained the single most important mechanism for expanding homeownership access in Jamaica, and March 2008 saw continued processing of applications under its various mortgage products. NHT rates — ranging from 0% for the lowest income beneficiaries to 5% for those at higher income thresholds — stand in sharp contrast to commercial lending conditions and represent a significant subsidy that the Trust has, for decades, channelled toward working Jamaicans.

The Golding administration’s housing agenda remained focused on expanding the supply of affordable units, with Housing Agency of Jamaica (HAJ) schemes in various stages of development across multiple parishes. The critical challenge, as housing analysts have noted, is that construction cost inflation — itself a function of global commodity price pressures — is eroding the financial viability of schemes designed to hit affordable price points. The arithmetic of subsidised housing is becoming harder to balance as input costs rise faster than wage growth.

There is also a regulatory dimension: planning approvals in some parishes continue to move at a pace that frustrates developers. The Urban Development Corporation and parish councils are under pressure to accelerate permitting while maintaining environmental and structural standards — a balance that is not easily achieved with constrained administrative resources.

Construction Sector

The construction industry in Jamaica is a direct transmission mechanism for global commodity price shocks, and March 2008 provided fresh evidence of that vulnerability. Cement prices — a function of both energy costs (cement is energy-intensive to produce) and imported clinker costs — remained elevated. Steel rebar, critical to reinforced concrete construction in a seismically active island, tracked international steel prices upward. For developers with fixed-price contracts signed in 2007, the margin compression has been acute.

Smaller contractors — the backbone of self-build and incremental housing construction in rural and peri-urban Jamaica — are particularly exposed. These operators typically lack the purchasing power to hedge input costs or to renegotiate supply contracts, and they are passing increases on to clients where possible. The result is a widespread slowing of self-build activity, which historically has been a critical pathway to homeownership for Jamaicans outside the formal housing market.

Tourism-related construction on the north coast, while not immune, has fared better. Hotel and resort operators with access to international financing and hard-currency revenues can absorb local cost inflation more readily, and pipeline projects in Trelawny, St James, and Portland continue to advance — though at a more measured pace than in 2006–2007.

Investment Climate

The Bear Stearns collapse is significant for Jamaica not merely as a spectacle of Wall Street fragility but as a potential signal about the trajectory of global capital flows. Emerging markets and small open economies like Jamaica depend on the continued willingness of international investors to hold local currency instruments and to finance current account deficits. When risk appetite contracts in New York and London — as it sharply did in the week of March 14 — the reverberations are felt, with a lag, in Kingston.

The Jamaica Stock Exchange’s main index reflected some of this anxiety, with selective selling in financial sector stocks. Real estate investment remains an attractive hedge for local investors against both inflation and currency risk, but the entry price for quality assets has risen faster than rental yields, compressing the return on investment for would-be landlords in the Kingston market.

Foreign direct investment in real estate — particularly from the Jamaican diaspora and from North American and European lifestyle buyers targeting the north coast — remained a stabilising factor. The exchange rate, while under pressure, still offered a degree of purchasing power advantage to dollar-denominated buyers.

Diaspora and Remittances

Remittance inflows — which constitute one of Jamaica’s largest sources of foreign exchange — remained broadly supportive of household consumption and, in some cases, real estate activity during the coverage period. However, early signals from the United States suggest that the economic slowdown there is beginning to affect Jamaican communities in New York, Florida, Connecticut, and the wider northeast corridor. Job losses in sectors where Jamaican migrants are concentrated — healthcare support, hospitality, construction — may, if they persist, translate into reduced remittance volumes later in the year.

For now, the Bank of Jamaica’s data suggest remittances are holding up, but the trend is worth monitoring carefully. A meaningful reduction in remittance inflows would have a material impact on foreign exchange supply, on household spending power, and — not least — on the ability of diaspora members to make the real estate purchases in Jamaica that they have historically made at a rate of several hundred transactions per year.

Affordability Watch

The affordability gap in Jamaica’s housing market is structural, but the events of early 2008 have widened it further. The key inputs into the affordability equation are all moving in an adverse direction simultaneously: construction costs are rising, financing costs remain elevated, and wage growth is insufficient to close the gap. The NHT provides a partial solution for qualifying contributors, but its reach — while substantial — does not extend to the informal sector, to non-contributors, or to those whose incomes fall above the threshold for the most concessionary rates but below the level at which commercial mortgages become manageable.

Policy analysts and housing advocates have for some years called for a more comprehensive approach to housing finance — one that might include a secondary mortgage market, credit guarantee instruments, or expanded lease-to-own schemes. The political bandwidth for such reforms is limited in the current environment, but the pressure will grow as the affordability crisis deepens.

Looking Ahead

The collapse of Bear Stearns is, in the view of most serious financial analysts, unlikely to be a contained episode. The structural vulnerabilities it exposed — excessive leverage, opaque derivative exposures, dependence on short-term funding for long-term assets — are not unique to one institution. The question for Jamaica, and for all small open economies, is the extent to which the strains visible in the US financial system will translate into tighter global credit, slower capital flows, and reduced appetite for emerging market risk.

For the housing market specifically, the coming months will test whether the relative stability of the first quarter can be maintained as external headwinds intensify. Oil prices show no sign of retreating from triple-digit levels; construction costs will remain elevated; and financing conditions are unlikely to ease materially. The base case is a market that continues to function — transactions will occur, developments will proceed — but at a pace and price level that excludes a growing share of would-be buyers. The opportunity, if there is one, lies in the NHT pipeline and in well-capitalised developers who can absorb near-term margin pressure in anticipation of a market that eventually normalises.

Jamaica Homes Monthly Housing & Development Review is published on the first business day of each month. Next edition: May 3, 2008, covering April 3–May 2, 2008.

Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomesnews Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com