Walls Closing In: Jamaica’s Housing Market as the Global Recession Takes Hold

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

• Six months after the Lehman Brothers collapse triggered the global financial crisis, Jamaica’s housing market is feeling the recession’s full force
• Tourism arrivals are declining; the first quarter of 2009 has been the weakest since the aftermath of the 2001 September 11 attacks
• Remittances are falling as diaspora Jamaicans in the United States and United Kingdom face rising unemployment and income pressure
• NHT continues to disburse at reduced levels; its institutional resilience is the housing market’s primary stabiliser
• Commercial banks have tightened mortgage underwriting significantly; the affordable formal housing market is effectively frozen outside the NHT channel
• The JLP government under Prime Minister Golding is pursuing fiscal consolidation and IMF discussions while managing a social environment of rising economic stress

Six months have passed since Lehman Brothers filed for bankruptcy protection on September 15, 2008, and the global financial system entered the most severe crisis since the Great Depression. For Jamaica, a small open economy intimately connected to the United States and United Kingdom through tourism and diaspora remittances, the global crisis has arrived with the force of a wave that has been building for months. The first quarter of 2009 has brought the steepest decline in tourist arrivals since the weeks after September 11, 2001. The remittance data for early 2009 shows a significant year-on-year decline for the first time in years. And the commercial banks, responding to deteriorating portfolios and heightened risk aversion, have substantially tightened mortgage underwriting standards across the board.

The housing market’s April 2009 condition is grim but not catastrophic. The NHT continues to function. The construction sector, while deeply suppressed, retains its core capacity. The diaspora, while sending less, has not stopped sending. Jamaica’s housing market has an institutional structure that is more resilient than many commentators appreciate, and that resilience is being tested — and, so far, is holding — through this most severe of external shocks.

The Tourism Channel: How a Global Recession Reaches Jamaica’s Doorstep

Tourism’s direct impact on Jamaica’s housing market operates through income and employment. Hotels, resorts, restaurants, transportation services and the vast informal economy that surrounds them employ a significant share of Jamaica’s workforce. When tourism falls, these workers face reduced hours, lower tips, lost employment. Their mortgage serviceability falls. Their rental payments are under pressure. Their capacity to save for deposits diminishes. In resort communities, the additional effect on property values — which are directly linked to rental income potential from vacation lettings — is immediate and measurable. April 2009’s tourism weakness is translating directly into these downstream housing market effects.

Fiscal Tightening and Housing Investment

The Golding government is managing the recession’s revenue consequences with a fiscal discipline that the IMF programme context requires. Tax revenues are below target as economic activity slows. The response has been to maintain primary surplus targets through expenditure restraint, including in capital spending. This compression of public capital expenditure has direct housing market consequences: the infrastructure investment that opens new residential development corridors, the serviced land that government agencies supply to developers, the NHT partnerships that the Trust relies on to deliver affordable units — all of these are constrained in a fiscal environment where every non-essential capital commitment is under scrutiny.

What This Means

For buyers in the NHT system, April 2009 is a moment to proceed, not to wait. The NHT’s rates are unchanged and the Trust is disbursing. Property prices in the affordable segment are not inflating; if anything, softening in some areas. Sellers are motivated. The case for a financially sound NHT transaction is at least as strong as it was before the crisis, and in some respects stronger: the rental alternative is more expensive in real terms than it was two years ago, and the NHT’s subsidy is more valuable relative to commercial alternatives than it has been in years.

For resort-area property investors, the tourism recession has created the entry valuations that patient, long-term investors seek. Jamaica’s tourism fundamentals — climate, culture, coast, airlift — are permanent. The current recession is cyclical. Investors who can carry assets through the cycle will be rewarded. Those who are leveraged and dependent on short-term rental income to service debt face a more difficult near-term environment.

The Outlook: Waiting for Washington to Turn

Jamaica’s housing market recovery depends substantially on a US recovery that is not yet visible in April 2009’s economic data. The G20 governments have committed to massive fiscal stimulus packages. The Federal Reserve has cut rates to near zero. The policy response to the global crisis is unprecedented in scale. If that response works — and the history of economic cycles suggests it eventually will — Jamaica’s tourism and remittance channels will recover, and the housing market’s conditions will improve. The question is timing. For April 2009, the honest answer is: not soon. But the direction, when it turns, is clear.

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

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