Oil, Food, and the Squeeze on Jamaica’s Housing Market — May 2008

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

Month in Brief

• Crude oil prices surpassed US$110 per barrel in April, sustaining intense pressure on Jamaica’s fuel import bill and adding further momentum to domestic inflation that was already running well above the Bank of Jamaica’s target band.
• A global food price crisis — driven by a confluence of supply shocks, rising energy costs for agricultural production, and increased demand from emerging markets — continued to affect Jamaica’s import-dependent food supply chain, with staple prices rising sharply at the retail level.
• The US Federal Reserve cut rates again in April to 2.0%, further telegraphing the depth of its concern about credit market conditions; the spread between US rates and Jamaican commercial lending rates widened to a historically large margin.
• Jamaica’s construction sector reported continued cost escalation, with some contractors citing input cost increases of 15–20% over the prior twelve months — a figure that is forcing project repricing and, in some cases, outright deferral.
• The Jamaican dollar came under modest depreciation pressure as the trade deficit widened on account of higher import costs; the Bank of Jamaica’s foreign exchange reserves provided a buffer but were drawn down modestly through the month.
• Tourism arrivals remained positive year-on-year, providing an important counterweight to the deteriorating trade position and sustaining employment in the north coast corridor that feeds into property demand in Montego Bay and Negril.

Housing Market Overview

The Jamaican residential property market in April 2008 reflected, with unusual clarity, the double pressure of elevated financing costs and rising construction expenses. Buyers who can afford to purchase — those with NHT eligibility or with sufficient equity to access commercial mortgages on manageable terms — are confronted with a market in which the asking prices for new-build properties have risen materially over the past eighteen months. Those price increases are not primarily a function of speculative excess but of genuine cost-push inflation in building materials: cement, steel, glass, and timber have all become significantly more expensive.

The secondary market — resales of existing homes — presents a somewhat different picture. Sellers in this segment are not facing the same cost pressures as developers, and pricing has been more stable. There are pockets of value, particularly in established but unfashionable neighbourhoods in Kingston’s middle belt and in some rural parish markets. However, the absence of a robust secondary mortgage market in Jamaica means that even attractively priced resale properties require buyers to navigate the same constrained financing environment as those purchasing new builds.

Parish-level variation is notable: St James and Trelawny on the north coast continue to see activity driven by the hospitality and tourism economy, while rural parishes such as St Elizabeth and Westmoreland remain quiet, with limited formal market activity and a predominance of self-build and incremental construction.

Government Policy and the NHT

April saw continued delivery under National Housing Trust-funded schemes, with the agency processing mortgage applications and disbursing funds under its various income-tier products. The NHT’s concessionary rates — which represent a genuine and material subsidy to qualifying workers — remain the primary tool through which the Jamaican state promotes formal homeownership.

The challenge that housing policy analysts are increasingly flagging is the supply side: even with concessionary financing in place, there are insufficient housing units being brought to market at price points that NHT beneficiaries at the lower income tiers can afford. Construction cost inflation is the proximate cause, but it is compounded by the slow pace of land development, the cost of servicing (roads, water, sewerage), and the administrative friction in the planning approval process.

The Housing Agency of Jamaica has several schemes at various stages of development, and the Golding government has expressed its commitment to accelerating delivery. However, the fiscal arithmetic is challenging: subsidised housing requires either cross-subsidy from higher-margin units or direct government support, and the budget environment in 2008 — with rising fuel and food import costs pressuring both the current account and government expenditure — is not conducive to large new spending commitments.

Construction Sector

The construction sector’s cost environment in April 2008 was, by any measure, exceptionally difficult. The combination of globally elevated commodity prices — steel, copper, aluminium, timber — and the specific pressure of high oil prices on energy-intensive materials such as cement and asphalt created a cost structure that threatened the viability of multiple categories of development project.

Established developers with strong balance sheets and existing land banks were best placed to absorb these pressures, adjusting project timelines and, where possible, locking in material supplies at current prices as a hedge against further escalation. Smaller operators, and particularly the self-build segment that serves the majority of Jamaicans who become homeowners outside the formal developer market, had no such recourse.

Contractors active in the commercial and infrastructure segments — road rehabilitation, public building maintenance, school construction — noted that government contracts, whose pricing was often fixed well before the current cost environment materialised, were generating losses or minimal margins. The industry is in dialogue with relevant government agencies about mechanisms for contract price adjustment, though no formal framework has yet been agreed.

Investment Climate

For real estate investors in Jamaica, April 2008 offered a mixed picture. The case for property as an inflation hedge remained compelling — in an environment where the consumer price index is rising and where monetary policy has limited room to tighten without choking growth, hard assets tend to preserve value. Commercial real estate in Kingston’s New Kingston business district and in the Half-Way Tree retail corridor attracted interest from institutional and high-net-worth investors on this basis.

Residential investment yields, however, were under pressure. Rental rates in most Kingston markets had not risen commensurately with asset prices, meaning that gross yields on residential rental property were compressing. For investors reliant on leverage, the combination of lower yields and higher financing costs made the numbers work only for those who anticipated significant capital appreciation over a medium-term horizon.

International investor interest in Jamaica’s north coast resort property market remained resilient, supported by the continuing appeal of Jamaica as a lifestyle destination and by the relative price advantage that the island offers compared with comparable markets in Barbados or the Cayman Islands.

Diaspora and Remittances

Remittance inflows, while still positive, were showing early signs of the stress that a slowing US economy was placing on Jamaican migrant communities. April data from the Bank of Jamaica suggested that the year-on-year growth rate of remittance receipts was decelerating, even if absolute volumes remained substantial. The diaspora real estate buyer — a Jamaican resident in New York, London, or Toronto who saves over several years to purchase a home or plot in Jamaica — is sensitive to employment conditions in the country of residence, and those conditions were worsening through early 2008.

The food price crisis had an important household-level dimension for Jamaica: families receiving remittances were allocating a larger share of those funds to food costs, leaving less available for housing-related savings or investment. This is a subtle but material constraint on the diaspora’s capacity to participate in the Jamaican property market at the rate seen in prior years.

Affordability Watch

A household earning Jamaica’s median wage of approximately J$15,000–18,000 per month faces an affordability wall that has grown materially higher over the past two years. A basic NHT-eligible unit in a scheme such as Portmore or Waterford, priced at J$3.5–4.5 million, represents approximately 15–20 years of gross income at the median — a ratio that, while not exceptional by international standards, is severe when set against the realities of income volatility, informal employment, and limited savings infrastructure in Jamaica.

The food and fuel crisis is exacerbating this affordability constraint by raising the cost of living at the bottom of the income distribution, leaving less residual income available for housing-related saving. Policy responses targeted at food and fuel prices — subsidies, price controls, trade policy adjustments — have direct relevance to the housing affordability question even when they are not framed in housing terms.

Looking Ahead

The outlook for May and the remainder of the second quarter is dominated by two uncertainties: the trajectory of oil prices and the pace of deterioration in the US economy. If crude oil continues its ascent toward the levels that some analysts are now projecting — US$120 or beyond — Jamaica’s import bill will rise further, the current account deficit will widen, and the pressure on the exchange rate and on domestic inflation will intensify. If the US economy continues to slow, remittance inflows and diaspora investment in Jamaican property will face additional headwinds.

Against this backdrop, the housing market’s best case is one of managed stability: transactions proceed at a reduced but sustained pace, developers adjust their project pipelines to reflect current market realities, and the NHT continues to provide a floor of activity through its scheme delivery and mortgage disbursement. A more adverse scenario — in which oil prices spike sharply, the exchange rate depreciates significantly, and remittances fall — would test the resilience of the market more severely. Prudent market participants are advised to plan for a range of outcomes rather than a single base case.

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

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