Annual inflation crests 24 per cent, the Bank of Jamaica raises its repo rate to 14.70 per cent in a single June move, and NHT housing starts collapse 64 per cent — a quarter that marks the moment Jamaica’s property expansion of 2003-07 conclusively ends.
Highlights
- Crude oil averages US$123.91 a barrel across the quarter, heading for its July peak
- Point-to-point inflation reaches 24 per cent; food prices up 35 per cent annually
- BOJ raises repo rate 50 basis points on 26 June, lifting the ceiling to 14.70 per cent
- Commercial bank weighted average lending rate settles at 16.97 per cent
- NHT housing starts fall 64 per cent and completions drop 53 per cent year-on-year
- Jamaica dollar depreciates to J$71.89 per US dollar as terms of trade worsen 30 per cent
The letters arrived quietly at first — notices from the commercial banks adjusting variable mortgage rates upward by half a point here, a quarter point there. By June, the cumulative effect was unmistakable. Households that had stretched to buy during the boom years of 2004 to 2006 were now committing fifteen to seventeen per cent annually on loans that had once seemed manageable at twelve. And behind every upward adjustment stood the same arithmetic: oil at one hundred and twenty-four United States dollars a barrel, food inflation at thirty-five per cent, and a central bank that had run out of choices.
The second quarter of 2008 will be remembered as the period when Jamaica’s inflation psychology broke. For the first five years of the decade, the Bank of Jamaica had gradually, painstakingly compressed annual inflation from the double digits of the late 1990s toward the single-digit target embedded in its framework agreements with the IMF. By March 2008 that work was unravelling. By June, with point-to-point inflation at 24 per cent and food inflation at 35 per cent, the bank moved decisively — raising the 180-day repo rate by fifty basis points on 26 June, pushing the effective ceiling across its open market operation instruments above fourteen per cent. The signal was clear: the era of gradually falling borrowing costs that had sustained the property market’s five-year run was over.
The proximate cause was global but the transmission was brutal. Jamaica imports nearly all of its energy and a substantial share of its food. When crude oil rose from ninety-five dollars a barrel in January to an average of one hundred and twenty-four dollars across the second quarter, with the futures market pricing in further gains toward a peak that would arrive in July, the island’s terms of trade deteriorated by 13.1 per cent in three months alone — cumulatively nearly thirty per cent below the prior year. Every barrel of heavy fuel oil burned at the Jamaica Public Service’s generation plants, every litre of diesel in the delivery fleet, every imported food staple landing at Kingston Wharves arrived at a higher price in Jamaican dollars whose purchasing power was simultaneously eroding. The current account recorded outflows of US$554 million across the quarter.
Finance Minister Audley Shaw had presented his first full Budget in April under precisely these conditions, attempting the near-impossible task of trimming the fiscal deficit while energy and food costs ballooned. The government’s fuel import bill was consuming an ever-larger share of foreign exchange earnings. Shaw’s calculations depended on assumptions about oil prices and growth projections that the market was already invalidating before the Budget speeches concluded. GDP for the quarter was tracking between minus 0.5 and plus 0.2 per cent — near flat, and well below the 0.7 per cent quarterly average that budget projections required. Agriculture recorded its fourth consecutive quarter of contraction, with domestic crops down 6.2 per cent. Manufacturing continued to decline. Only tourism showed a pulse, with stopover arrivals up 4.1 per cent annually.
The property market’s vital signs, when examined closely, were no longer merely cooling — they were contracting. The National Housing Trust recorded housing starts down 64.2 per cent and completions down 52.6 per cent compared with the corresponding quarter of 2007. These figures captured not only the demand side — fewer Jamaicans qualifying for mortgages at nearly seventeen per cent commercial lending rates — but also the supply side, where developers who had acquired land during the boom years were now shelving projects rather than bringing them to market at costs they could not recover in sales prices buyers could afford. The commercial bank weighted average lending rate, at 16.97 per cent, was more than three percentage points above its 2005 level and approaching the threshold at which even established homeowners with equity began to consider their options carefully.
Personal lending growth, the canary that signals consumer confidence before headline statistics catch up, slowed to 1.9 per cent in the quarter — a fraction of its 7.4 per cent five-year average. Jamaicans were not borrowing for appliances, furniture, or the ancillary spending that typically accompanies property acquisition. The productive sector, by contrast, saw commercial loan growth of 20.2 per cent as companies borrowed to fund oil-inflated working capital — warehousing more inventory, hedging against further price rises, bridging the gap between invoice date and customer payment. It was credit deployed defensively, not expansively.
The Jamaica dollar held better than many had feared. The weighted average selling rate at end-June settled at J$71.89 to the United States dollar, a quarterly depreciation of 1.11 per cent — below the five-year average of 1.55 per cent for June quarters. The Bank of Jamaica’s net international reserves rose to US$2.23 billion, bolstered by net foreign currency purchases of US$220 million across the quarter. These figures offered some reassurance that the exchange rate, one of the most psychologically sensitive variables in Jamaican economic life, would not compound the inflation shock with a currency collapse. But they offered no comfort about the trajectory of costs.
For property owners considering selling, the quarter introduced a new calculus. Listing prices had not yet fallen in nominal terms — sellers were reluctant to acknowledge losses on assets purchased at boom-era prices, and the absence of a formal index meant that price discovery remained slow and anecdotal. But time on market was lengthening. Buyers who could qualify at sixteen per cent were running careful affordability arithmetic and arriving at lower offers. The growing spread between what sellers expected and what buyers could finance was producing a market in suspension rather than in collapse — but the direction was clear to anyone watching transaction volumes rather than asking prices.
What This Means
The second quarter of 2008 is the inflection point. Jamaica’s property market had survived and thrived through the early years of the decade on a specific combination of falling interest rates, rising remittances, improving infrastructure, and growing confidence. All four of those supports are now weakening simultaneously. BOJ rate decisions will be driven by global inflation dynamics that Jamaica cannot control, and another increase — or several — cannot be ruled out before year-end. Oil prices at US$125 to US$147 a barrel, wherever the peak lands, will work through into higher construction costs, higher utility bills, and higher transport costs that squeeze both buyers’ disposable incomes and developers’ margins. The six to eighteen month outlook carries genuine downside risk: if the global economy tips into the recession that credit markets are already pricing, remittance flows — the bedrock of lower-income property financing — will fall, NHT contribution levels will decline, and the pool of qualifying buyers will shrink further. The market’s next chapter will not be written in listing prices but in the quieter columns recording transaction volumes and mortgage approvals.
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