Surging Oil and a Slowing World: Jamaica’s Housing Sector Holds Its Ground — June 2008

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

Month in Brief

• Crude oil prices rose sharply through May, approaching US$130 per barrel by month-end as supply constraints and speculative positioning combined with persistent demand from Asia to drive prices toward levels not previously observed; Jamaica’s fuel import bill reached a new monthly high.
• Global food commodity prices remained acutely elevated, with the UN Food and Agriculture Organisation warning of sustained food insecurity across import-dependent developing nations; Jamaica’s consumer price index for food recorded further month-on-month increases.
• The US housing market deteriorated further: May data showed continued declines in home prices in major US metropolitan areas, and several major mortgage lenders reported sharply higher delinquency rates — a reminder that the US credit crisis remained far from resolved.
• Jamaica’s Bank of Jamaica held its policy rate steady, balancing inflationary pressures against the need to avoid choking off a domestic economy already under stress from cost-push forces; commercial mortgage rates remained entrenched in the 15–18% range.
• The Jamaican dollar edged lower against the US dollar, trading in the J$78–82 range as the widening trade deficit and decelerating remittance growth weighed on foreign exchange supply.
• Jamaica’s tourism sector continued to perform adequately, supporting employment and business activity on the north coast, though high fuel prices were raising concerns about the economics of long-haul air travel to the island for European visitors.

Housing Market Overview

Jamaica’s housing market in May 2008 was characterised by a cautious steadiness rather than any dramatic movement in either direction. Transaction volumes remained below the levels of 2005–2006, and the pipeline of new schemes coming to market was constrained by the very cost pressures that had been building throughout the first half of the year. Yet neither was there evidence of the kind of distressed selling or precipitous price decline that was beginning to manifest in parts of the United States and, to a lesser degree, in the United Kingdom.

The Jamaican market’s relative stability in the face of a severely adverse external environment reflects a number of structural features that distinguish it from the markets now experiencing the most acute distress. Mortgage penetration in Jamaica is relatively low — the majority of Jamaican households do not carry a formal mortgage, having accessed homeownership through self-build, inheritance, or purchase with savings accumulated over many years. This means that the transmission mechanism from credit market disruption to housing market distress is less direct in Jamaica than in highly leveraged markets.

The primary constraint on the Jamaican market is, and has been throughout 2008, the affordability gap: the distance between what households can borrow or save and what it costs to buy or build a home. That gap has widened through cost-push forces, and it will not narrow quickly.

Government Policy and the NHT

May 2008 saw continued NHT scheme delivery, with the Trust processing applications and progressing construction at several ongoing developments. The NHT’s role as the primary vehicle for formal affordable housing delivery in Jamaica is not in question; what is in question is whether its resource base — funded by payroll contributions from employees and employers — is sufficient to address the scale of unmet demand.

The Golding government’s broader economic management challenge through May was the management of inflationary pressure while avoiding a sharp contraction in growth. The government’s fuel subsidy arrangements and its interventions in the food import chain were directed at the most visible symptoms of the commodity price shock; their effect on housing affordability was indirect but real, insofar as they preserved some of the disposable income that households might otherwise have needed to redirect from housing savings to food and energy expenditure.

Planning and regulatory reform remained a medium-term agenda item rather than an immediate priority, but the housing industry’s lobby groups continued to press for faster approvals and a more coherent framework for land development. The fragmented nature of planning authority across different agencies and parish councils remains a significant impediment to the efficient delivery of new housing supply.

Construction Sector

Oil approaching US$130 per barrel in May had direct and immediate consequences for Jamaica’s construction sector. Diesel fuel — the primary energy source for most construction equipment and for the trucks that move materials to site — reached new retail price peaks, adding to project costs in a way that was difficult to absorb or pass on in an already price-sensitive market.

Cement, whose manufacturing process is highly energy-intensive, also continued to rise in price. Caribbean Cement Company, the dominant producer supplying the Jamaican market, was not immune to global energy cost pressures, and its pricing reflected this reality. Contractors have increasingly sought to substitute alternative materials where possible — for instance, exploring the use of lightweight hollow concrete blocks rather than solid blocks in internal wall construction — but the scope for material substitution without compromising structural integrity in a hurricane- and earthquake-prone environment is limited.

The labour market in construction remained relatively stable, with employment holding up reasonably well given the circumstances. The self-build segment, which employs large numbers of informal workers, saw a slowing in activity as household budgets came under pressure and as the cost of starting or completing a self-build project rose.

Investment Climate

The investment case for Jamaican property in May 2008 rested primarily on two pillars: inflation hedging and tourism-driven demand on the north coast. For Kingston residential investors, the arithmetic of rental yield versus financing cost was challenging, but those with patient capital and a multi-year horizon saw property as a store of value in an environment of rising prices and currency uncertainty.

The north coast resort market — Montego Bay, Negril, Ocho Rios, and the emerging Falmouth corridor in Trelawny — continued to attract interest from overseas buyers, including both the Jamaican diaspora and international lifestyle investors. This market is less sensitive to Jamaican financing costs (most overseas buyers transact in cash or use overseas financing) and more sensitive to the appeal of Jamaica as a destination, which remained strong despite the global economic headwinds.

Commercial real estate in Kingston continued to attract interest from investors seeking yields above those available on government instruments, particularly in the office and retail segments. The retail corridor at Constant Spring Road and the emerging commercial nodes in Portmore saw continued developer interest, though project delivery timelines were being extended to reflect cost realities.

Diaspora and Remittances

The diaspora dimension of Jamaica’s housing market received notable attention in May as analysts began to quantify the potential impact of a prolonged US economic downturn on remittance flows. Jamaica receives approximately US$1.8–2.0 billion in remittances annually — a sum that exceeds foreign direct investment inflows and is comparable in scale to tourism receipts. Any significant reduction in this flow would have economy-wide consequences, and the housing market would feel the effect through reduced purchasing power among diaspora buyers and reduced household savings among remittance recipients.

Early indications from the US suggested that Jamaican communities in the northeast and in Florida were experiencing employment stress in the construction and hospitality sectors — two areas where Jamaicans are significantly represented. The full effect of this stress on remittance volumes had not yet become apparent in the data, but the direction of travel was clear.

Affordability Watch

The affordability challenge in Jamaica’s housing market has become, by May 2008, a crisis in the making rather than a merely chronic problem. The cost of a modest but adequately built home — a two-bedroom concrete structure on a properly titled lot in a serviced development — had risen to levels that placed formal homeownership beyond the reach of the majority of Jamaican households outside the NHT system. Within the NHT system, the combination of concessionary rates and scheme pricing maintained some access, but the pipeline of units available was insufficient to meet latent demand.

The alternative of renting — which serves a large proportion of Jamaican households — was also becoming more expensive as landlords sought to pass on rising costs. The rental market in Kingston, in particular, had seen meaningful rent increases over the prior twelve months, further reducing the savings capacity of households aspiring to eventual homeownership.

Looking Ahead

The second half of 2008 will be shaped significantly by whether oil prices stabilise, rise further, or — as some contrarian analysts are beginning to suggest — eventually correct from their elevated levels. The commodity price environment of mid-2008 is sufficiently extreme that a partial reversal, were it to occur, would provide material relief to Jamaica’s import bill, its inflation rate, and ultimately to construction costs.

For the housing market, the most constructive development would be a combination of easing commodity prices and a resumption of NHT scheme delivery at scale. Neither is assured, and the prudent assumption must be that the difficult conditions of the first half of 2008 persist into and through the second half. In that scenario, activity will remain subdued, developers will proceed cautiously, and the affordability gap will continue to define the market’s fundamental constraint.

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