Recession Bites: Jamaica’s Housing Market Faces Its Toughest Year in Two Decades — February 2009

Publication Date: 3 February 2009 | Coverage Period: 3 January–2 February 2009 | Category: Monthly Review

The Month in Brief

• Barack Obama was inaugurated as the 44th President of the United States on 20 January 2009, and his administration has moved with notable speed to advance an economic recovery package through Congress; as of press date the bill is under active debate and has not yet been signed into law.
• US job losses for December 2008, revised upward to 577,000, confirmed that the labour market deterioration accelerating into the new year is among the most severe in post-war US history.
• Jamaica’s Planning Institute (PIOJ) published preliminary estimates indicating that GDP contracted in the third quarter of 2008, with fourth-quarter figures expected to confirm that the economy entered recession in the second half of last year.
• The Bank of Jamaica maintained elevated policy rates through January, prioritising currency stability as the Jamaican dollar remained under moderate depreciation pressure, trading in the J$89–92 range.
• Several commercial banks quietly tightened residential mortgage underwriting criteria in January, raising minimum deposit requirements and income verification standards in response to rising arrears across consumer loan portfolios.
• NHT opened its January 2009 contribution benefit window to strong demand, with the Trust reporting that application volumes exceeded those of the equivalent period in 2008, as commercial alternatives became less accessible.

Housing Market Overview

January 2009 brought Jamaica’s property market into the new year without the customary post-Christmas resurgence of buyer activity. The seasonal pattern that typically sees January and February as months of renewed property search — fuelled by year-end bonuses, returning diaspora visitors, and the clarity of a new budget cycle — failed to materialise in any meaningful form. Agents across Kingston, Montego Bay, and the north coast resort areas reported inquiry volumes running 30–40% below January 2008, itself a subdued month by recent standards.

The bid-ask spread that had been widening through the fourth quarter of 2008 narrowed marginally in a handful of segments, not because buyer confidence improved but because a small number of motivated sellers — including estates, developers facing cash flow pressure, and homeowners whose income has been affected by employment changes — reduced asking prices to levels at which transactions became possible. These are not distressed sales in the US sub-prime sense; they are the rational adjustments of sellers who understand that the market has moved and who prefer liquidity to indefinitely holding unsaleable assets.

The most resilient segment continues to be affordable new construction supported by NHT finance: developments in St. Catherine and Clarendon priced below J$8 million and accessible to NHT borrowers have continued to transact at or near asking prices, supported by pent-up demand from the Trust’s large contributor base. This segment — characterised by first-time buyers accessing subsidised finance for modest units — has remained largely insulated from the external shock because its primary financing mechanism is not correlated with global capital market conditions.

Government Policy and Regulatory Environment

The Golding administration’s January budget review confirmed what the deteriorating revenue data had made predictable: fiscal targets set in the April 2008 budget are not achievable given the fall-off in consumption, corporate profit, and tourism earnings. The government has indicated it will maintain core capital expenditure commitments, including housing-related infrastructure, while trimming recurrent expenditure in the face of revenue shortfalls. How this plays out in practice — specifically whether road construction, sewerage upgrades, and other infrastructure that underpins new residential development will proceed on schedule — remains to be seen.

Dialogue between Jamaica and the International Monetary Fund, which had been characterised as exploratory through the fourth quarter of 2008, appears to have intensified in January. The government has maintained its position that it is not seeking a formal IMF programme at this stage, but the gap between this stated position and the economic reality — a deteriorating current account, falling reserves, and a fiscal position increasingly difficult to close without external support — is narrowing. The terms and conditions of any eventual arrangement would have direct implications for public sector wages, capital expenditure, and social programme spending, all of which affect housing sector demand.

Commercial mortgage rates held in the 15–18% range through January. The BOJ’s policy stance, combined with elevated global risk premia, leaves no room for meaningful rate reduction in the near term. Property industry participants have made submissions to the government requesting consideration of targeted interest rate relief measures — subsidised rates for first-time buyers, for instance, or guarantee structures that would reduce the risk weighting of mortgage assets for commercial lenders — but no policy response has been forthcoming.

Construction and Development Activity

The construction sector in January confirmed the pattern established in the fourth quarter of 2008: activity on committed projects, silence on new ones. Developers with projects in active construction — funded through pre-sales agreements or committed institutional finance arranged before the credit environment changed — are proceeding; developers at the planning or early-financing stage are not moving. The result, visible from any vantage point across the Kingston metropolitan area, is a construction sector operating at perhaps 60–65% of its 2007 capacity.

Materials costs have stabilised at levels substantially below their 2008 peaks. Steel rod, cement, aggregate, and timber prices all declined through the second half of 2008 as global demand destruction outweighed supply constraints. For the projects that do proceed in 2009, input cost assumptions are considerably more favourable than they were eighteen months ago — a partial offset to the financing and demand headwinds that bear down on the sector more broadly.

The NHT’s January construction update reported continued progress on sites in St. Catherine, St. James, and Clarendon, with approximately 400–450 units across these schemes expected to reach practical completion in the first quarter of 2009. This pipeline of affordable completions — modest by the standard of the latent demand, but meaningful in the context of severely constrained private supply — represents the most significant contribution to new housing stock in the current cycle.

Investment and Capital Flows

The Obama administration’s inaugural address and subsequent policy communications have been received with cautious optimism in international capital markets, though the practical work of designing and passing the economic recovery package is proving more contested than the administration had perhaps anticipated. As of press date, the American Recovery and Reinvestment Act is working its way through Congressional debate, with its final size and composition not yet determined. For Jamaica, the key variables are the extent to which US employment and consumer spending stabilise once the package is enacted — and how quickly those stabilising effects transmit through remittances, tourism, and diaspora investment.

In the domestic institutional market, the first weeks of January saw some tentative signs that the worst of the mark-to-market deterioration in local investment portfolios had passed. Equity markets in the US and Europe, while not recovering, had ceased their freefall. Local building societies and insurance companies reported that the capacity for new mortgage origination, while constrained, was somewhat better than the picture in October and November. This does not signal a resumption of credit growth but suggests that the system has moved from crisis to managed difficulty.

Diaspora Dimension

The inauguration of President Obama on 20 January was an occasion of considerable significance for Jamaica’s diaspora, which had invested heavily in the political process leading to the election. The atmosphere in diaspora communities across New York, Toronto, and South Florida was, by all accounts, celebratory. The question, however, is whether celebration translates into economic confidence — and on that measure, the picture remains difficult.

US employment data for December and January confirmed that the diaspora’s primary employment sectors — construction, healthcare support services, transit, and hospitality — are shedding jobs at an accelerated rate. The construction industry in the New York and New Jersey metropolitan areas has been particularly hard hit, with project cancellations and financing failures reducing active sites significantly. Diaspora members employed in this sector face genuine income uncertainty, and the consequent reduction in their capacity to remit is a direct transmission channel from the US construction downturn to the Jamaican housing market.

Provisional remittance data for January suggests that inflows are running approximately 12–15% below year-earlier levels — a deterioration from the already-reduced levels of the fourth quarter of 2008. The PIOJ and BOJ have both highlighted remittance compression as a significant near-term risk to the Jamaican external account and to household income in the communities most dependent on transfers.

Affordability and the NHT

The NHT’s January loan application processing confirmed what the volume data suggested: demand for Trust mortgages has increased as commercial alternatives have become less accessible. The Trust’s income-tiered rate structure — 0% for the lowest earners, graduating to approximately 5% for contributors approaching the income ceiling — represents a form of housing subsidy that the current environment makes more, not less, essential.

The affordability arithmetic in the commercial market has not improved. A J$6 million property — a modest two-bedroom unit in a middle-ring Kingston suburb — requires a deposit of at least J$900,000 (15%) and carries monthly repayments, at 16% over 20 years, of approximately J$82,000. Against a median household income estimated at J$35,000–40,000 per month, this equation cannot be made to work. The NHT, for qualifying contributors, can bridge this gap; commercial finance cannot. The implications for housing policy — and for the long-term adequacy of the Trust’s funding model — deserve more systematic attention than they have received.

Looking Ahead

February 2009 will be shaped by two developments neither yet concluded at press date: the passage of the US stimulus package and the outcome of Jamaica’s ongoing fiscal deliberations. The stimulus package, expected to be enacted within days or weeks, will provide an important signal about the US policy response to recession; its employment and demand effects will take longer to manifest but will ultimately determine the pace at which Jamaica’s own external environment stabilises.

For the domestic market, the near-term outlook is one of continued adjustment. Volumes will remain depressed, financing will remain constrained, and the upper end of the market will continue to see downward pressure on prices as sellers confront the reality that 2007 valuations are not recoverable in the current environment. The NHT will remain the primary source of market activity in the affordable segment. The developers and agents who navigate 2009 successfully will be those who correctly assess the location and price point at which NHT-financed demand remains robust — and position their projects accordingly.

Jamaica Homes Monthly Housing and Development Review is published on the first business day of each month. This edition covers the period 3 January to 2 February 2009.