Stimulus Signed: Obama’s Recovery Act Takes Effect — What It Means for Jamaica’s Housing Market — March 2009

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

The Month in Brief

• President Obama signed the American Recovery and Reinvestment Act (ARRA) into law on 17 February 2009, committing approximately US$787 billion in fiscal stimulus through a combination of infrastructure investment, tax cuts, and social programme extensions; the package is the largest peacetime fiscal intervention in US history.
• US equity markets continued to fall through February, with the S&P 500 reaching multi-year lows as investors weighed the stimulus package against further deterioration in bank balance sheets and economic data.
• Jamaica’s PIOJ released fourth-quarter GDP data confirming that the economy contracted in the second half of 2008, with the full-year contraction estimated at approximately 1.8%, the first annual decline since 1999.
• The Bank of Jamaica intervened in the foreign exchange market on multiple occasions through February, with the exchange rate remaining in the J$89–92 per US dollar range.
• Tourist arrivals for January 2009 were reported by the Jamaica Tourist Board at approximately 11% below January 2008 levels, with stopover visitors showing the sharpest decline.
• The Jamaica government confirmed that formal discussions with the IMF regarding a possible standby arrangement have advanced, though no agreement has been reached; the talks are expected to continue through March.

Housing Market Overview

The signing of the American Recovery and Reinvestment Act on 17 February represents the most significant policy event of the current period and, potentially, the inflection point at which the trajectory of the US economy — and by extension Jamaica’s external environment — begins to stabilise. The ARRA’s US$787 billion in commitments spans infrastructure, green energy, education, healthcare, and tax relief, with significant investment directed toward states with the highest unemployment concentrations. For Jamaica’s diaspora-linked economy, the critical transmission channels are employment in construction and services, consumer confidence, and the pace at which household incomes recover sufficiently to resume remittances at pre-crisis levels.

Jamaica’s domestic property market through February remained in the subdued condition that has characterised it since the fourth quarter of 2008. Transaction volumes across all segments remain depressed relative to historical norms; the upper end continues to see the most acute softening in both activity and — increasingly — in list prices; and the affordable NHT-supported segment continues to perform relatively well against the commercial market backdrop. There is, however, a growing sense among industry participants that the market is approaching a floor in terms of sentiment: buyers who have held back for six months are beginning to ask at what price and under what conditions they might re-engage.

Price discovery is advancing more rapidly in some sub-markets than others. The St. Andrew hills — Norbrook, Cherry Gardens, Stony Hill — which attracted the highest valuations at the cycle peak, are seeing the most visible price adjustments, with properties listed in 2007 now carrying discounts of 8–12% from original asking prices. In the mid-market suburbs of St. Catherine and Portmore, the NHT’s continued lending activity has provided a degree of price support that is not present in the commercial-market-dependent upper tier.

Government Policy and Regulatory Environment

The Golding administration’s engagement with the IMF has moved to the centre of Jamaica’s economic policy debate. The government faces a fiscal gap that multilateral support appears best placed to bridge, and the terms under which that support will be provided — likely involving fiscal consolidation commitments, public sector wage restraint, and structural reform benchmarks — will have material implications for public expenditure including housing-related programmes. The market is watching these negotiations carefully.

The BOJ maintained its defensive monetary stance through February, with policy rates held at levels that continue to bear down on the domestic economy. The central bank’s February quarterly monetary policy report acknowledged the recessionary conditions but indicated that currency stability remained the paramount near-term objective. A premature relaxation of monetary policy that triggered exchange rate depreciation would, the BOJ judged, cause more damage than the current combination of tight money and slow growth.

Commercial mortgage rates remain in the 14–18% range. There is growing industry sentiment that the BOJ’s eventual pivot — when it comes — should be accompanied by targeted measures to improve mortgage market accessibility, including possible guarantee schemes for NHT-eligible borrowers seeking commercial top-up finance. These proposals have not yet advanced to the level of formal policy consideration.

Construction and Development Activity

The construction sector in February showed marginal improvement in sentiment, if not yet in activity levels. The signing of the ARRA in the US, with its substantial infrastructure components, raises the prospect that US construction employment — a primary occupation of Jamaica’s diaspora labour force — may stabilise sooner than would otherwise have been the case. Domestic contractors who had placed export of construction labour on hold pending US market conditions are cautiously reconsidering their timelines.

Domestic construction starts remained depressed. Building approval data for January — the most recent available — showed continued year-on-year declines in both commercial and residential permits, though the rate of decline moderated from the sharp falls recorded in October–December 2008. Industry participants interpret this as suggesting that the most acute phase of the permit withdrawal has passed, with the remaining declines representing a slower-moving structural adjustment to reduced demand rather than a panic response to crisis.

NHT construction activity continued at a robust pace through February, with the Trust’s sites in St. Catherine and St. James progressing toward Q1 completions. The Trust’s forward planning for new schemes has not been curtailed: NHT officials have indicated that planning and tender processes for schemes to be started in 2010 are proceeding on schedule, providing continuity in the pipeline of affordable units that will come to market in subsequent years.

Investment and Capital Flows

The passage of the ARRA has provided some improvement in international investor sentiment toward emerging markets, though this has not yet translated into renewed FDI flows toward Jamaica. The global deleveraging cycle that began in 2008 will take time to unwind: financial institutions in the US and Europe are still repairing balance sheets, and the appetite for cross-border real estate lending — the instrument through which much of the 2005–2007 Caribbean resort investment was financed — will not recover until that repair is well advanced.

Domestic institutional investors — building societies, insurance companies, pension funds — are showing cautious interest in resuming mortgage origination at volumes closer to pre-crisis levels. Several institutions have revised their mortgage lending guidelines in February, adjusting product terms and rate structures in anticipation of a gradual improvement in the credit environment. This is not yet a resumption of normal market functioning, but it is a directional improvement from the paralysis of the fourth quarter.

Diaspora Dimension

The ARRA’s most direct relevance to Jamaica’s diaspora lies in its infrastructure and public works components, which will generate construction and maintenance employment in the states and cities where Jamaican-born workers are most concentrated. New York, New Jersey, and Florida — which together account for the majority of Jamaican remittances — are expected to receive substantial ARRA infrastructure allocations. If the employment effect materialises on the timescale the administration projects, remittance flows could begin to stabilise through the second half of 2009.

For now, however, the data remains difficult. February remittance data — provisional, based on early BOJ returns — suggests continued year-on-year declines in the 10–15% range. Diaspora members who retain employment are generally maintaining their sending behaviour, but the proportion of diaspora workers who have lost jobs or experienced significant income reduction has risen materially since the fourth quarter of 2008. The human dimension of this — the families in Portmore and Spanish Town and Half Way Tree who are managing on materially reduced incomes — deserves acknowledgement alongside the aggregate data.

Affordability and the NHT

The NHT remains the defining institution of Jamaica’s affordable housing market. Through the coverage period, the Trust has continued to process applications, issue approvals, and disburse mortgages at a pace that has kept the affordable segment of the market functioning when everything above it has contracted severely. This is precisely the role that the Trust’s architects envisaged: a countercyclical provider of housing finance that maintains access through conditions in which the private market withdraws.

The structural affordability problem in the commercial segment has not improved. Commercial rates remain prohibitive for median-income earners, and the BOJ’s policy trajectory does not suggest early relief. The NHT’s lending ceiling — the maximum loan amount available to contributors — has not been revised in line with property price inflation over recent years, creating a situation in which the Trust’s loan amounts are increasingly insufficient to cover the purchase price of even modest units in urban areas. This gap between NHT loan amounts and actual property prices is a medium-term policy challenge that the current crisis has made more visible.

Looking Ahead

March 2009 will be watched for signs of stabilisation in the US economic data — the leading indicators of employment, housing starts, and consumer confidence that will indicate whether the ARRA’s effects are beginning to register. For Jamaica, the near-term focus is the IMF negotiation: an agreement — if and when it is reached — will provide balance of payments support and restore international confidence in Jamaica’s fiscal trajectory, but will do so at the cost of commitments that will constrain domestic expenditure.

The property market’s own March outlook is one of cautious positioning. There are early signs of seller adjustment, selective buyer interest at adjusted prices, and tentative improvement in institutional mortgage appetite. None of this constitutes a recovery; all of it is consistent with a market that is finding its floor after six months of severe external shock. The question for the remainder of 2009 is not whether Jamaica’s housing market has been damaged — it has, materially — but whether the damage is containable and the foundations for eventual recovery intact. The evidence, viewed dispassionately, suggests the answer to both is yes.

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