Finding the Floor: Jamaica’s Property Market Seeks Its Footing After Six Months of Crisis — April 2009

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

The Month in Brief

• The G20 summit in London on 2 April 2009 produced a US$1.1 trillion package of commitments to support the global economy, including a trebling of IMF resources and coordinated fiscal expansion; market reaction was broadly positive, with global equities rallying on the announcement.
• US equity markets staged their strongest monthly performance since 2003 in March, with the S&P 500 rising approximately 8.5% from its early-March lows, though analysts caution that this may represent a technical rally rather than a fundamental recovery.
• Jamaica’s government and the IMF moved closer to an agreement on a standby arrangement through March, with Finance Minister Shaw indicating that terms are under active negotiation and that a conclusion is expected in the coming weeks.
• The Bank of Jamaica signalled in its March monetary policy statement a tentative willingness to consider rate reductions if inflation data and external conditions permit, the first such signal since the onset of the crisis.
• Tourist arrivals for February 2009 showed a year-on-year decline of approximately 9%, a slight improvement from the January 2009 comparison, prompting cautious optimism that the rate of tourism revenue deterioration may be moderating.
• The American Recovery and Reinvestment Act’s initial infrastructure disbursements began flowing to US states in March, with early implementation data suggesting that the construction employment effect is beginning to register in major urban centres.

Housing Market Overview

March 2009 brought the first tentative evidence that Jamaica’s property market may be approaching a cyclical floor. This is not a recovery: transaction volumes remain deeply depressed relative to historical norms, financing conditions remain difficult, and the external environment, while showing early signs of stabilisation, has not yet turned. But the tone of market commentary has shifted, almost imperceptibly, from the paralysis of the fourth quarter of 2008 toward something that might, with careful optimism, be characterised as cautious reassessment.

The evidence is fragmentary and should not be overstated. In specific sub-markets — mid-range properties in the J$6–12 million band in St. Catherine and the Portmore corridor; affordable units in NHT-served developments — buyer engagement has increased modestly from the near-zero levels of November and December 2008. Agents report that buyers who had withdrawn from the market are returning to enquire, though the proportion converting enquiries to offers, and offers to completions, remains low. Due diligence periods have lengthened; financing conditions are subjecting prospective buyers to renewed scrutiny; and the gap between what buyers are prepared to offer and what sellers are willing to accept remains non-trivial in the upper and upper-middle market.

The upper end of the Kingston residential market — properties above J$30 million in Norbrook, Cherry Gardens, and the hills of St. Andrew — has not yet found its floor. Sellers who had resisted price adjustments through the fourth quarter and early 2009 are now confronting the reality that the buyers who would have purchased at 2007 prices are simply not present in sufficient numbers, and that the buyers who are present are demanding concessions that sellers find uncomfortable but increasingly accept as the cost of liquidity. The price adjustment process in this segment is ongoing and not complete.

Government Policy and Regulatory Environment

The G20 London summit on 2 April — occurring one day after this edition’s coverage period closes but providing the essential context for its forward-looking assessment — produced commitments that significantly increase the resources available to the IMF and other multilateral lenders. For Jamaica, the trebling of IMF resources matters directly: it increases the pool from which Jamaica’s own potential standby arrangement would be drawn, and reduces the probability that Jamaica faces a queue for resources in the event of continued external pressure.

The BOJ’s March monetary policy statement represented the first tentative shift in tone since the onset of the crisis. While maintaining its current rate stance, the central bank indicated that it is monitoring conditions for the possibility of rate reductions — a signal that the defensive posture of the past six months may, in time, give way to a more supportive monetary environment. For the mortgage market, even a modest reduction in policy rates — if transmitted to commercial lending rates — would represent a meaningful improvement in affordability for commercial borrowers. The direction of travel, if not the timing, appears to be shifting.

The American Recovery and Reinvestment Act, signed in February and now in early implementation, provides an important context for Jamaica’s own policy choices. The ARRA commits the United States to sustained fiscal expansion over a two-year period, providing a macroeconomic floor under the US economy that is the primary external determinant of Jamaica’s remittance and tourism revenues. If the ARRA delivers on its employment projections — an estimated 3.5 million jobs saved or created over two years — the stabilisation of Jamaica’s external position will follow, with a lag.

Construction and Development Activity

The construction sector in March showed the first genuine improvement in forward-looking indicators since the crisis onset. Several developers who had suspended project planning in the fourth quarter of 2008 have resumed feasibility work and pre-marketing activities, albeit at a very early stage and without commitment to construction start dates. This is not a resumption of building activity but an early signal that confidence in the eventual viability of new projects has not been extinguished.

Materials costs remained at their post-crisis lows through March. Steel rod, cement, and aggregate prices, which had fallen sharply from their mid-2008 peaks, stabilised through the first quarter of 2009 at levels that provide a considerably more favourable input cost environment than developers faced eighteen months ago. The combination of reduced input costs and lower land values — a consequence of the price adjustment now underway at the upper end — means that the economics of new development, while not yet compelling, are materially better than they were at the cycle peak.

The NHT’s first-quarter construction performance met its revised targets, with completions in St. Catherine and St. James proceeding to programme. The Trust’s second-quarter construction schedule is understood to include a new scheme announcement in Clarendon, subject to infrastructure readiness, which would add to the affordable supply pipeline for late 2009 and 2010.

Investment and Capital Flows

March’s global equity market rally — the strongest monthly performance since 2003 — has restored some paper wealth to the portfolios of Jamaican institutional investors. Local pension funds and insurance companies that had reported significant mark-to-market losses on international equity and fixed-income positions through the fourth quarter of 2008 and January 2009 will record partial recovery in their March valuations, improving their capital positions and — over time — their capacity for new mortgage origination.

Foreign direct investment in Jamaican real estate remains at a low level, but the first cautious green shoots are visible. Two north coast resort developers who had suspended their marketing programmes in October 2008 have quietly re-engaged their North American sales channels, offering revised pricing and financing terms designed to attract buyers who remain interested but require greater certainty of value. These are not large-scale marketing campaigns; they are careful tests of whether the market has stabilised enough to support renewed activity. The early indications, while not yet conclusive, are modestly encouraging.

Diaspora Dimension

The ARRA’s early implementation data from March suggests that infrastructure and public works projects in the northeastern United States — the primary diaspora employment region — are beginning to move through the planning and contract award stage. Full employment effects typically follow contract awards by three to six months as projects mobilise. For Jamaican-born construction workers in New York and New Jersey, meaningful ARRA-driven employment improvement may therefore not be visible until the second half of 2009, but the direction is positive.

Remittance data for February — the most recent available — showed a year-on-year decline of approximately 11%, a modest improvement from the 13–15% declines recorded in November through January. This sequential improvement, while small, is consistent with the hypothesis that the worst of the remittance compression has passed and that the declines, while still significant, are no longer accelerating. The BOJ will publish its first-quarter remittance data in April, and this will provide a more authoritative read on whether the trend has indeed turned.

Diaspora engagement with Jamaican property, while subdued, has not vanished. Members of the diaspora who are in stable employment and whose US housing situation did not involve the adjustable-rate mortgage and negative equity problems that afflicted many American homeowners at the cycle peak are beginning, cautiously, to re-engage with the Jamaican market. The conversations agents are having are longer and more conditional than they were in 2007, but they are happening. This constituency — the financially stable diaspora buyer with a long-term repatriation horizon — will be among the first to return when confidence solidifies.

Affordability and the NHT

The NHT’s first-quarter 2009 lending data, expected to be published shortly, is anticipated to show that mortgage disbursements remained at a robust level, consistent with the Trust’s countercyclical mandate. The Trust’s contribution base — which continues to grow as employment, while under pressure, has not collapsed — provides a reliable funding stream that supports continued lending at a pace that commercial institutions cannot match in the current environment.

The BOJ’s tentative shift in tone on rates offers the first prospect — still distant, but real — of a future in which commercial mortgage rates move from their current 14–18% range toward levels at which a broader share of Jamaican households can qualify for home financing. The arithmetic of affordability does not need rates to fall to NHT levels to improve meaningfully; even a reduction of 300–400 basis points in commercial mortgage rates would expand the addressable market substantially. When that reduction comes — and the BOJ’s signals suggest it is a question of when rather than if — it will represent the most important structural improvement in Jamaica’s housing finance environment in years.

Looking Ahead

The second quarter of 2009 will be shaped by three developments now approaching resolution: the Jamaica–IMF standby arrangement, the early evidence on ARRA’s employment effects, and the BOJ’s monetary policy trajectory. Each of these could, if positive, contribute to the stabilisation of Jamaica’s external position and the gradual improvement of the domestic property market’s operating environment.

Jamaica’s housing market has absorbed an external shock of historic proportions with greater resilience than many comparator markets. The absence of a US-style speculative cycle at the peak, the conservatism of local underwriting standards, the structural role of the NHT, and the inherent resilience of a market in which most participants are owner-occupiers rather than leveraged investors have all contributed to an outcome that is painful but not catastrophic. Transaction volumes will recover before prices, and prices in the most speculative segments will recover last. But recover they will, on a timeline that depends chiefly on the pace of the US economic recovery and the restoration of Jamaica’s own macroeconomic stability.

After six months of navigating the most severe global financial crisis since the 1930s, Jamaica’s property market is not yet through the adjustment, but it is — just possibly — beginning to see the other side of it.

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

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