The timing could not have been more brutal. In 2007 and 2008, Jamaica’s property market was at the peak of its confidence — construction booming, diaspora money flowing, international buyers discovering the north coast, apartment towers rising in Kingston’s skyline for the first time in a generation. Then, in the second half of 2008, from a country whose mortgage market most Jamaicans had barely heard of, a catastrophe of global proportions began to unfold. By the time the summer of 2009 arrives, the picture has changed so completely that it is difficult to believe it is the same market that was breaking records eighteen months ago. Jamaica’s property sector is in its most difficult position since the financial crisis of the mid-1990s, and the forces acting against it are not domestic in origin and not under domestic control.
Jamaica’s GDP contracted by approximately 3.4 percent in fiscal year 2009/10 — the sharpest single-year contraction in decades. The global financial crisis, which began with the collapse of Lehman Brothers in September 2008 and rapidly transmitted through the interconnected global financial system, has arrived in Jamaica through every channel that matters: falling remittances, falling tourism revenue, contracting foreign direct investment, weakening export earnings, and the kind of general confidence collapse that no policy intervention can immediately reverse.
This is not Jamaica’s fault. The island did not create collateralised debt obligations, did not issue subprime mortgages, did not participate in the leveraged excess that brought down the global financial system. But it is absorbing the consequences of that excess with the full vulnerability of a small open economy that depends on the prosperity of the advanced world for its remittances, its tourists, and its foreign investment. Jamaica is, in the summer of 2009, paying a price it did not incur.
What 2008 Looked Like Before It Collapsed
To understand the scale of what has happened to Jamaica’s property market in the eighteen months since mid-2008, you must understand how strong the market was before the crisis hit. The year 2008 was, for a significant portion of its duration, a continuation of the boom that had been building since approximately 2003. Tourism revenue reached a peak of US$2.22 billion — the highest Jamaica had ever recorded. Remittances were at their all-time peak of approximately US$2.02 billion, equivalent to 15-17 percent of GDP. The Jamaican dollar, while slowly depreciating, had not yet entered the sharp decline that would follow.
The property market of 2008 reflected this confidence. The real estate and construction sector grew at approximately 30 percent in nominal terms — down from the extraordinary 36.5 percent of 2006-07, but still a figure that represented genuine, broad-based construction activity at a pace the market had not sustained since the early 1990s. Apartment construction in Kingston was at its highest levels since independence: new towers in New Kingston and along the Half Way Tree Road corridor, new mid-rise complexes in the hills of Cherry Gardens and Barbican, new townhouse schemes in St Catherine that were selling quickly to buyers who could not afford Kingston prices but did not want to be far from the capital.
The north coast was experiencing a genuine resort property renaissance. Gated villa and condominium developments near Montego Bay and Negril were attracting buyers from North America, the United Kingdom, and the Jamaican diaspora. The development community had begun to reach into parishes that had previously seen little formal residential construction — St Thomas, Clarendon, the rural parishes that became accessible as the road network improved and buyers began to look beyond the traditional Kingston and resort-town markets. This geographic expansion of the market was one of the most significant structural developments of the boom era, and it suggested that the demand for quality Jamaican residential property was both deep and geographically broad.
Then, in the final months of 2008, the global financial crisis arrived. And everything changed.
The Mechanisms of Transmission: How a Crisis in America Became a Crisis in Jamaica
The global financial crisis reached Jamaica through multiple channels, each of which struck a different part of the property market’s supporting structure.
Remittances were the first and most immediate shock. Jamaicans abroad — in the United States, Canada, and the United Kingdom — experienced the financial crisis as job losses, reduced hours, constrained credit, and the evaporation of savings held in financial instruments that had appeared safe. The ability and willingness to send money home declined sharply. Remittances fell by approximately 11.2 percent in 2009 — a reduction of around US$225 million from the 2008 peak of US$2.02 billion. For Jamaica’s property market, which depends on remittance flows for everything from incremental household construction to down payments on formal mortgages to diaspora retirement investments, this was a primary shock that preceded and accompanied every other form of market weakness.
Tourism was the second channel. Jamaica’s tourism receipts fell from US$2.22 billion in 2008 to US$2.07 billion in 2009 — a decline of 6.84 percent. The interesting thing about the tourism data is that stopovers did not collapse as dramatically as revenue, because Jamaica’s competitive pricing kept the destination attractive even as visitor budgets tightened. But the revenue per visitor fell as hotels and all-inclusive resorts competed fiercely for a reduced pool of leisure travellers, and the high-spending segment of the tourist market — the villa renters, the premium resort guests, the buyers of vacation real estate — contracted most sharply. The north coast property market felt this immediately.
Foreign direct investment declined. The international buyers who had been active in the Jamaican market in 2006-2008 — the North American retirees seeking Caribbean coastal property, the British investors diversifying into Caribbean residential assets, the institutional developers from the United States and Canada who had been scoping resort development opportunities on the north coast — withdrew from or postponed their Jamaican investments as the global credit conditions that funded those investments evaporated. Projects that had been at advanced planning stages were shelved. Letters of intent were not converted into contracts. The international property investment that Jamaica had been hoping would provide a structural upgrade to its resort real estate sector simply stopped.
The exchange rate added another layer of complexity. The Jamaican dollar, which had been depreciating gradually against the US dollar for years, accelerated its decline: 5.5 percent in 2008, then a further 9.4 percent in the first quarter of 2009 alone. For diaspora buyers who were measuring Jamaican property values in US dollar terms, this depreciation created a confusing and deterring effect. In US dollar terms, the asking prices for Jamaican properties had not fallen commensurately with the weakening economy — sellers were pricing in Jamaican dollars at levels that reflected the Jamaican dollar cost of replacement, not the market’s US dollar clearing price. The result was a currency-driven overvaluation that deterred foreign and diaspora buyers precisely when their investment was most needed.
The State of the Market Sector by Sector
The Kingston residential market in mid-2009 has shifted from boom conditions to a state of cautious contraction. The apartment projects completed in 2008 and early 2009 have largely been absorbed by the rental market at yields that are below what was projected when the projects were launched. This is not a catastrophe — the buildings are occupied, the rents are being paid, and the developers are not yet under acute financial pressure. But it is a clear signal that the supply of new apartment units in Kingston has outrun the demand for ownership, and that the investor appetite for new apartment development, which was very strong in 2006-2008, has abruptly stalled.
The townhouse and family home market is similarly cautious. The schemes in St Catherine that were selling quickly in 2007-2008 are now selling slowly, if at all. Developers who had planned second and third phases on the basis of the first phase’s absorption rates are reconsidering. The buyers who should be moving up from rental accommodation into first-time homeownership are finding that their employment situations have become less certain, that their income growth has slowed, and that the J$4.5 million NHT ceiling, combined with their savings, does not cover the cost of the property they were hoping to buy. They are staying in rental accommodation and waiting.
The north coast resort markets are in a more acute form of distress than the Kingston residential market. The international and diaspora buyers who were the fuel of the Montego Bay and Negril markets have largely withdrawn. Villa developments that were at various stages of completion or pre-sales are struggling to close the transactions that were in progress before the crisis. The developers who built for an international market that has now paused are carrying inventory they cannot move at their asking prices and cannot afford to heavily discount without triggering a default on their development finance.
Mortgages in a High-Rate Environment
Building society mortgage rates in 2009 are running at approximately 12-12.5 percent. These rates are not primarily a product of the global financial crisis; they reflect Jamaica’s long-standing structural problem of high public debt crowding out private credit at low rates. The fiscal dynamics that keep Jamaican government bond yields high also keep the financial institutions’ cost of funds high, which in turn keeps their lending rates, including mortgage rates, high relative to the rates that prevail in the advanced economies from which Jamaica’s property market draws its comparisons and its diaspora investors.
At 12 percent, the affordability arithmetic for any meaningful residential mortgage is deeply challenging. A J$8 million mortgage over twenty years at 12 percent requires monthly payments of approximately J$88,000. The gross monthly income of a nurse, a teacher, a mid-level civil servant, or a junior bank officer in Jamaica in 2009 is unlikely to reach J$200,000. The bank will typically lend to a maximum of one-third of gross income — which means the nurse or teacher can qualify for a mortgage that services at approximately J$65,000 per month, implying a maximum loan of around J$6 million at 12 percent. In a market where a decent new townhouse costs J$8-10 million and a modest three-bedroom house in an established Kingston neighbourhood costs J$12 million or more, this qualifying capacity leaves a gap that most buyers cannot bridge from savings.
The NHT continues to be the essential lifeline for working Jamaicans seeking formal homeownership. Its subsidised rates and its loan ceiling of J$4.5 million, while inadequate for much of the Kingston market, remain the most accessible form of formal mortgage finance available to the majority of Jamaican workers. In the current environment, NHT-financed transactions constitute an even higher proportion of total formal mortgage originations than in normal times, simply because commercial mortgage credit has effectively withdrawn from the market.
The Currency and the Confidence Problem
Jamaica’s exchange rate is, in the summer of 2009, one of the most destabilising forces affecting the property market’s near-term trajectory. The rapid depreciation of the Jamaican dollar in the first quarter of 2009 — 9.4 percent in three months — has created a crisis of confidence among the diaspora investors and international buyers on whom the Jamaican property market depends for a significant proportion of its upper-market demand. When the currency is moving at that pace, nobody denominating their investment in US dollars can make a rational acquisition decision: the target price they set in week one has changed materially by week four, and the legal process of completing a Jamaican property transaction takes months, during which the currency might move further against them.
The Bank of Jamaica has intervened to slow the depreciation, using foreign exchange reserves to smooth the most violent movements. But reserves are finite, and the market knows it. The uncertainty around the currency is itself a deterrent to investment, independent of where the actual rate lands. Confidence requires predictability, and the exchange rate, in the first half of 2009, has been anything but predictable.
Looking Toward 2010: The Difficult Year Ahead
The honest forecast for 2010 is not reassuring. GDP will continue to contract. Tourism revenue will remain below its 2008 peak. Remittances will recover partially, but the full restoration of diaspora earning capacity will take time. The exchange rate will be volatile. And the government’s fiscal situation — already stretched before the crisis — will be further strained by the revenue shortfall that accompanies economic contraction, potentially leading to difficult choices about fiscal adjustment that will have their own contractionary effects on the economy.
The property market will continue to weaken in 2010. Transaction volumes will fall further from their already reduced 2009 levels. New construction starts will be minimal. The developers who made commitments in 2007-2008 will be focused on completing existing projects rather than initiating new ones. And the buyers who should be moving from renting to owning will remain in rental accommodation, waiting for a combination of improved economic conditions, lower mortgage rates, and greater confidence in the exchange rate that will not arrive in 2010.
The one structural positive that is beginning to take shape in 2009-2010 is the potential for a Jamaica Debt Exchange that would restructure the government’s domestic debt obligations and create the conditions for lower domestic interest rates, including mortgage rates. If such an exchange occurs — and the fiscal arithmetic increasingly suggests it will be necessary — it will be the most important single event for Jamaica’s property market affordability since independence. But it will not arrive in time to change the picture for 2010, and its property market effects will take eighteen to twenty-four months to work through the system.
This is, in many ways, the hardest kind of market to navigate: one where the structural forces that will eventually produce recovery are visible but distant, where the immediate conditions are challenging, and where the rational response of most market participants — to wait — is also the response that prolongs the weakness. But the demand for Jamaican property has not evaporated. It has been deferred. The diaspora investor who was ready to buy in 2008 has not become someone who will never buy in Jamaica; they have become someone who will buy when the conditions improve. The conditions will improve. They always do. The question of 2009 and 2010 is not whether Jamaica’s property market will recover. It is how much patience the recovery will require.
In the summer of 2009, the answer is: more than most people were hoping for. Considerably more.
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