Between Recession and Recovery: Jamaica’s Housing Market in the Grip of Global Crisis

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

• Jamaica’s economy is in recession; the global financial crisis that struck in September 2008 has compressed tourism revenues, remittances and investment flows through the first half of 2009
• The JLP government under Prime Minister Golding is managing the fiscal consequences of the downturn while pursuing IMF discussions that have not yet produced a formal agreement
• Commercial mortgage conditions are the tightest in years; banks facing rising arrears across their loan books have significantly tightened underwriting standards
• NHT remains operational and disbursing; the Trust’s reserves buffer the impact of reduced contribution income from a contracting formal labour market
• The summer tourism season is expected to be weaker than any since the 2001 shock; resort-area property markets are feeling the pressure of reduced visitor demand
• Construction activity has fallen sharply as the combination of tight credit, reduced demand and materials cost pressure has made new affordable development commercially unviable

It has been ten months since the collapse of Lehman Brothers announced to the world the full severity of the global financial crisis. In those ten months, Jamaica has been reminded — as it is in every global crisis — of how deeply its economic fortunes are intertwined with those of the larger economies in which its diaspora lives, its tourists originate and its export markets exist. The United States recession has cut both ways: it has reduced the income of diaspora Jamaicans whose remittances sustain hundreds of thousands of households on the island, and it has reduced the discretionary tourism spending of the American visitors who represent Jamaica’s largest visitor segment.

The housing market has absorbed these double blows on top of the structural constraints that have characterised it for years. In July 2009, the market is at a low point: formal transaction volumes are down, developer activity is minimal, and the NHT — always the last functioning element of formal affordable housing finance in Jamaica’s difficult moments — is stretched but holding. The question that the housing market and the broader economy need answered is the same question the IMF negotiations are trying to resolve: what is the path from this crisis to a sustainable fiscal position, and what does that path cost in terms of the adjustment that Jamaican households must absorb along the way?

Global Crisis, Local Consequences

Jamaica’s exposure to global economic cycles is structural and deep. Tourism represents approximately twenty percent of GDP and a much larger share of foreign exchange earnings. Remittances represent approximately fifteen percent of GDP in normal years. Together, these two channels of global connection mean that when the United States and United Kingdom slow down, Jamaica feels it within months. The 2009 slowdown is being felt across the economy: in hotel occupancies, in retail sales, in government tax revenues and in the mortgage market, where reduced household income is translating directly into reduced ability to service or qualify for housing debt.

The Credit Tightening and Its Housing Consequences

Jamaica’s commercial banks entered the global crisis with credit books that had been relatively conservative by the standards of many emerging markets, reflecting the discipline that the FINSAC experience of the late 1990s had instilled in the local financial sector. But conservative does not mean immune, and the combination of deteriorating economic conditions, rising arrears across consumer loan portfolios and the uncertainty of the macro environment has produced a significant tightening of mortgage underwriting standards at every major institution. Borrowers who would have qualified for commercial mortgages in 2007 are finding in 2009 that the same income level, the same credit history and the same deposit do not meet current requirements. The goalposts have moved.

What This Means

For buyers, July 2009 is an environment in which the NHT pathway is more valuable relative to the commercial alternative than at almost any point in recent memory. The subsidy embedded in the NHT’s administered rates represents genuine, tangible financial value that the commercial market has moved further away from, not closer to. NHT-eligible buyers with qualifying properties should not wait.

For sellers, the market’s reduced transaction volume and tighter credit conditions mean that buyers in the affordable and middle segments are fewer and more financially stretched than they were two years ago. Realistic pricing, NHT-eligible specifications and patience are the appropriate market strategies for 2009.

The Outlook: The Trough and What Lies Beyond

Jamaica’s housing market may be at or near the trough of its crisis cycle in July 2009. The global recession is expected, by most economists, to begin turning in 2010. Remittances should recover as diaspora income stabilises. Tourism should begin to recover as consumer confidence in the major source markets improves. The IMF discussions, when concluded, will establish the fiscal framework within which Jamaica’s debt trajectory can be managed toward sustainability. Beyond those events lies a housing market with better conditions: lower rates, recovering demand, returning developer confidence. The trough is painful. The recovery is real. The distance between the two, measured in time, is the one certainty that the housing market’s participants can rely upon to, eventually, close.

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

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