Obama Elected: What America’s New President Means for Jamaica’s Housing Outlook — December 2008

Publication Date: 3 December 2008 | Coverage Period: 3 November–2 December 2008 | Category: Monthly Review

The Month in Brief

• Senator Barack Obama was elected 44th President of the United States on 4 November 2008, winning a decisive electoral college majority over Senator John McCain; his victory has prompted hope — if not certainty — of a substantial US economic stimulus programme.
• US unemployment rose sharply through November, with non-farm payroll losses accelerating to levels not recorded since the early 1980s recession, dimming prospects for a near-term remittance recovery.
• The US Federal Reserve cut the federal funds rate to a range of 0.25–1.00%, signalling that monetary policy has reached its practical floor and that the weight of recovery will fall on fiscal stimulus.
• Jamaica’s tourism sector reported that winter advance bookings are running 12–15% below prior-year levels at major resorts, with the all-inclusive segment showing the sharpest deterioration.
• The Bank of Jamaica intervened repeatedly in the foreign exchange market through November to defend the Jamaican dollar, with the exchange rate stabilising in the J$89–92 per US dollar range.
• Commercial construction starts in Kingston fell to their lowest monthly level in at least four years, according to Building Approval data, as developers suspended new project launches pending clearer market signals.

Housing Market Overview

Barack Obama’s election on 4 November was received in Jamaica with a warmth that reflects both the historic significance of the event and the deep personal connections that bind the Jamaican diaspora to the political culture of the eastern United States. Beyond the emotional resonance, the election has clear economic implications that the country’s property market will be watching with close attention in the months ahead.

November’s domestic property market, however, remained subdued. The election result provided a brief uplift to global equity markets in its immediate aftermath, but this optimism gave way within days to the hard realities of deteriorating economic data. US job losses for October were revised sharply higher; major US retailers reported the worst monthly sales figures in decades; and the three largest US automakers disclosed that without federal assistance they faced insolvency within weeks. Against this backdrop, prospective Jamaican property buyers — particularly those with incomes or savings denominated in or linked to US dollars — remained on the sidelines.

Transaction volumes in the Kingston metropolitan area through November were estimated at approximately 25–30% below the equivalent period in 2007, with the upper and upper-middle segments most acutely affected. The Stony Hill, Norbrook, and Barbican residential corridors — which had maintained relatively stable enquiry levels through October — reported a further slackening in November as sellers began, with evident reluctance, to accept that list prices set in 2007 were no longer achievable. The first signs of genuine price discovery are emerging in these segments, with several properties now offered at meaningful discounts to original asking prices.

Government Policy and Regulatory Environment

The Golding government’s response to the worsening external environment has been characterised by fiscal caution and close monitoring of multilateral options. Finance Minister Shaw met with IMF representatives in November to discuss contingency arrangements, though the government has stopped short of formally requesting a programme. The political optics of an IMF agreement are complex in Jamaica, where the memory of structural adjustment programmes of the 1980s and 1990s remains a live political issue, and the administration is understandably reluctant to move in that direction unless compelled to.

Monetary policy remained tight through November, with the BOJ maintaining elevated rates in defence of the currency even as the real economy weakened. This policy combination — fiscal restraint and monetary tightening — is conventionally appropriate for an external shock but is not without cost: it depresses domestic demand at precisely the moment when the private sector most needs the government to maintain its expenditure commitments, and it raises the cost of debt service for the highly indebted public sector.

Commercial mortgage rates held in the 15–18% range through November. There is little near-term prospect of relief for commercial borrowers: the BOJ’s policy rate stance, the global repricing of credit risk, and the cautious posture of local lenders all point toward rates remaining elevated through at least the first half of 2009.

Construction and Development Activity

Building approval data for October — the most recent month available — confirmed the trend evident from ground-level observation: new construction permits fell sharply year-on-year, with residential approvals in the Kingston and St. Andrew Corporate Area at their lowest level since at least 2004. This leading indicator suggests that the pipeline of projects currently under construction will thin considerably through 2009 and 2010, with implications for the supply of new housing coming to market in the medium term.

The NHT continued to represent the most active construction entity in the affordable segment, maintaining sites in St. Catherine, St. James, and St. Ann. The Trust’s November construction update noted that material costs had eased somewhat from the mid-2008 peak, allowing project budgets to be met more comfortably, though labour costs had remained firm. NHT developments under active construction are estimated to represent approximately 850–1,000 units in various stages of completion, providing a meaningful flow of affordable supply into a market that needs it.

Investment and Capital Flows

The Obama election has created a measured optimism among some institutional investors about the trajectory of US economic policy, and by extension the pace of recovery in developed-economy capital flows to emerging markets. However, this optimism is operating against a structural backdrop of deleveraging that will constrain international capital for months, and possibly years, to come. The major US and European banks that intermediated much of the cross-border real estate finance of the 2004–2007 period are now in capital preservation mode, and their appetite for emerging market real estate lending will not return until their own balance sheets are repaired.

For the Jamaican institutional investment community, November brought a degree of stabilisation after October’s equity market turmoil. Local pension funds and insurance companies reported that the pace of mark-to-market deterioration in their international portfolios had slowed, though cumulative losses through 2008 remain significant. The capacity of these institutions to support new mortgage origination — either directly through their own lending or indirectly through the capital they provide to building societies and commercial banks — remains constrained.

Diaspora Dimension

The Obama election carried profound personal significance for Jamaica’s diaspora, a community that has historically maintained deep civic engagement in American political life alongside its ties to the island. Jamaican-Americans voted in large numbers in the November election, and the result was celebrated with considerable enthusiasm in communities from the Bronx to South Florida. This emotional investment reflects genuine hope that a new administration will pursue policies — on immigration, on housing relief, on employment — that will benefit diaspora households directly.

The economic reality for diaspora households, however, remains difficult. US unemployment, concentrated in precisely the construction, healthcare, and transit sectors where Jamaican-born workers are heavily represented, continued to rise through November. Remittance flows to Jamaica are now running an estimated 10–12% below year-earlier levels, and with the US labour market deteriorating, a recovery in remittances before mid-2009 appears unlikely. For Jamaican families who rely on US-origin transfers to meet mortgage payments, school fees, and household expenses, this represents a direct and immediate hardship.

Affordability and the NHT

December brings the NHT’s year-end lending review, and the Trust’s performance through 2008 stands in sharp contrast to the contraction in commercial mortgage activity. NHT loan disbursements through the fiscal year have maintained a relatively robust pace, supported by the Trust’s countercyclical mandate and its funding model, which is insulated from the volatility of capital markets. For the beneficiary population — contributors earning between J$5,000 and J$35,000 per month — NHT access has been the difference between home ownership and indefinite renting.

The commercial mortgage market remains, by contrast, functionally inaccessible to median-income earners. A household earning J$60,000 per month — itself above the national median — would struggle to qualify for a J$5 million mortgage at 16%, and would find the monthly repayment of approximately J$68,000 absorbs more than the entirety of take-home income after tax. This structural exclusion from commercial mortgage markets is not a crisis phenomenon but a chronic feature of Jamaica’s housing finance landscape; the current recession has merely made it more visible.

Looking Ahead

The December outlook for Jamaica’s property market is one of cautious endurance rather than recovery. The Obama administration will not take office until January, and the shape of the US stimulus package — which will be the primary instrument of economic recovery — will not be clear until the new Congress convenes. In the interim, the global economy continues to deteriorate, with the IMF’s November World Economic Outlook projecting global growth of only 2.2% in 2009 — below the threshold conventionally associated with global recession.

For Jamaica specifically, December brings the tourism high season with lower-than-expected occupancy, a fiscal picture that will require difficult decisions in the new year, and a property market that has moved from cautious to genuinely subdued. The structural features that insulate Jamaica’s market from the worst outcomes — conservative underwriting, a functional NHT, limited speculative excess at the peak — remain in place. But 2009 will test them. The year-end review that this publication will offer next month will confront, with clear eyes, how much has changed in twelve months.

Jamaica Homes Monthly Housing and Development Review is published on the first business day of each month. This edition covers the period 3 November to 2 December 2008.