A World in Crisis, a Market in Shock: Jamaica’s Housing Market Enters Its Most Testing Year

Jamaica Homes Housing Affordability & Cost of Living Review — January 2009

• The collapse of Lehman Brothers in September 2008 has triggered the most severe global financial crisis since the Great Depression; Jamaica enters 2009 braced for the consequences
• The JLP government under Prime Minister Bruce Golding, in its second year, faces the simultaneous challenge of managing fiscal consolidation and the global recession’s domestic fallout
• Commercial mortgage rates remain in the double digits; the combination of tight domestic credit and falling household income is further compressing affordable housing access
• NHT enters 2009 in reasonable financial health but with the awareness that contribution income will be under pressure as formal sector employment contracts
• The Jamaican dollar has weakened against the US dollar, raising import costs including construction materials and exacerbating the already acute housing supply constraint
• Tourism, the economy’s primary external earner, faces an extremely difficult year as recessionary pressures in the US and UK reduce discretionary travel spending

The new year opens with the world in financial crisis and Jamaica in the unfamiliar position of watching its fortunes deteriorate despite the relative prudence of its own domestic financial sector. The collapse of Lehman Brothers in mid-September 2008 — an event whose consequences are still being fully absorbed by financial markets, regulators and economists around the world — has triggered a sequence of credit tightening, asset value collapses and economic contraction in the United States and United Kingdom that is Jamaica’s disaster by contagion. The island did not cause this crisis. It cannot insulate itself from its effects. It must manage through them with the limited tools that a small, open, highly indebted economy has available.

For the housing market, the crisis arrives on top of a structure that was already severely constrained. Commercial mortgage rates in double digits, an NHT that is the primary affordable mortgage channel, a construction sector operating well below its potential, a planning system that adds cost and delay to every formal development. These were the market’s conditions before Lehman. The crisis makes them worse: it compresses household incomes through reduced tourism employment, lowers remittances as diaspora Jamaicans feel the US recession’s effects, and raises the risk aversion of lenders who were already conservative.

The Golding Government’s Housing Inheritance and Its New Challenge

The JLP, which won the September 2007 general election after two decades in opposition, inherited a housing market in transition: better than the FINSAC nadir of the late 1990s, better than the severe crisis of the early 2000s, but still characterised by chronic undersupply, high commercial mortgage rates and an NHT that was the primary channel of formal affordable finance. The government had pledged, in opposition and in its early months in office, to expand affordable housing delivery, improve NHT access and address the planning system’s costs. The global financial crisis that erupted in late 2008 has significantly reduced the fiscal and credit space within which those pledges can be honoured.

The government’s immediate priorities have shifted from housing expansion to fiscal stabilisation. Revenue below target, expenditure demands rising as the recession compresses economic activity, and the external financing environment tightened by the global credit squeeze — these are the conditions within which the 2009 budget must be set and the IMF discussions that the government needs must be conducted. Housing policy, important as it is for the long term, is not the priority in a crisis year.

The NHT’s Resilience: An Institution Built for This

The National Housing Trust’s design — contribution-funded, operationally independent, with mandated reserves — makes it precisely the kind of institution that a crisis tests and, if well-managed, ultimately validates. The Trust does not depend on the government’s ability to budget for housing expenditure. It does not depend on the commercial banks’ willingness to lend. It depends on payroll contributions from formal sector workers — contributions that continue as long as formal employment continues. That employment is under pressure in 2009, but it has not collapsed; the formal sector’s contraction, while real, is not catastrophic by the standards of some of Jamaica’s historical crises. The NHT enters 2009 with adequate reserves and a functioning mortgage disbursement operation.

What This Means

For buyers, January 2009 is a year to be cautious but not paralysed. NHT-eligible buyers with sound financial positions and qualifying properties should not let the global crisis postpone transactions that make individual financial sense. The macro crisis does not change the NHT’s rates or the value of accumulating housing equity versus continuing to rent. What it does change is the need for careful income stability assessment before committing to a mortgage: buyers whose employment is in sectors most exposed to tourism and global recession effects should be conservative about the income assumptions they make in their mortgage affordability calculations.

For the development industry, 2009 is a year for survival and positioning, not for expansion. The most important strategic task for Jamaica’s residential developers is to maintain organisational capacity and key relationships through a crisis period that will eventually end, positioning the enterprise for the recovery that the eventual economic turnaround will enable.

The Outlook: The Crisis Will Pass; the Question Is the Scar Tissue

Global financial crises end. History’s evidence on this point is consistent: the systemic interventions that governments and central banks have deployed in response to the 2008 crisis — bank rescues, fiscal stimulus, aggressive monetary easing — have always, in time, produced a recovery. The question is not whether the global recession ends but when, and what scarring it leaves behind in Jamaica’s housing market. The scarring can include: depleted NHT reserves that take years to rebuild; a construction sector whose capacity deteriorates through inactivity; a generation of aspiring buyers whose contribution records stall because they lose formal employment; communities of informal settlers whose housing quality declines through an extended period of reduced remittances. Minimising that scarring — keeping the NHT financially sound, keeping NHT contributors in contribution, keeping the construction sector’s key capacity intact — is the housing market’s most important task in 2009.

This review is produced for informational and journalistic purposes only and does not constitute financial, legal or investment advice.

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