Summer Tourism Lifts North Coast Slightly as Kingston Property Market Remains Subdued — September 2009

Publication Date: 3 September 2009 | Coverage Period: 3 August–2 September 2009 | Category: Monthly Review

Month in Brief

• Summer tourist arrivals modestly above depressed 2009 earlier months, providing limited relief.
• US Federal Reserve signals economy stabilising; global credit conditions ease marginally.
• Jamaica dollar under continued pressure; BOJ holds rate to defend currency stability.
• Construction material costs creeping upward as oil holds near US$70/barrel.
• NHT benefit applications remain robust; commercial mortgage market effectively closed to most buyers.
• Jamaica GDP contraction for full year 2009 now broadly expected to reach 3–4 per cent.

Housing Market Conditions

August is traditionally among Jamaica’s strongest months for residential property enquiries, buoyed by returning diaspora members who use summer visits to assess property options, and by the employment income generated in the tourism peak season. In 2009, both of these drivers have been materially weakened. Diaspora visitor numbers are below prior years, reflecting the deterioration in overseas Jamaicans’ financial positions. Tourism employment income, while somewhat improved from the severe H1N1-driven lows of May and June, has not recovered to 2008 levels.

The net result is an August property market that is more active than the preceding months — there is more enquiry and more property viewing activity — but that has not translated into materially higher transaction volumes. The August–September window is when the market’s underlying appetite becomes most visible; what is visible in 2009 is a substantial pool of interested potential buyers who are constrained by financing access rather than by desire to purchase.

In the corporate area, the pattern of extended days-on-market and negotiated price reductions in the J$8–20 million segment continues. Upscale listings in Norbrook, Cherry Gardens, and Jacks Hill that were placed on the market in early 2009 have not cleared. Some owners have withdrawn listings rather than reduce below psychological price floors, effectively reducing visible inventory without resolving the underlying oversupply at prevailing price levels.

The north-coast market shows the most visible improvement, albeit from a very low base. Montego Bay-area property enquiries from North American and British buyers have increased modestly compared with the April–June period. Some retired and semi-retired buyers, whose primary motivation is lifestyle rather than investment return, have re-entered enquiry mode following the worst of the H1N1 travel anxiety. A small number of transactions in the resort villa and retirement home segment were concluded during August in western parishes, the first meaningful activity in those segments since late 2008.

Government Policy

The Golding administration’s mid-year review will likely confirm that the fiscal consolidation path is being maintained, albeit under significant strain. Tax revenue underperformance — a direct consequence of the GDP contraction — has required expenditure adjustments within the 2009–10 budget envelope. Capital spending, including housing infrastructure and serviced land development, is among the categories most vulnerable to within-year cuts.

The National Housing Trust’s policy posture has not changed materially. The Trust continues to process applications and disburse loans within its established parameters. There is growing industry advocacy for a revision of the NHT loan ceiling, which at J$3.5–4.0 million is increasingly misaligned with the cost of even modest residential construction. A ceiling of J$5 million, adjusted for inflation since the last revision, would more accurately reflect the market reality for new affordable housing. The Trust’s board is understood to be conducting the actuarial analysis required to support any such revision.

On monetary policy, the Bank of Jamaica maintained its benchmark rate through August. The August inflation reading will inform September’s monetary policy committee deliberations. Should inflation prove lower than anticipated — a possible outcome given compressed consumer demand — the BOJ may have incrementally more room to consider a measured rate reduction. Any reduction would be modest and carefully communicated, but even a signalled intention to ease would have a positive psychological effect on housing market sentiment.

Construction Sector

The construction sector through August shows early signs of a floor forming, if not yet a recovery. The sharp contraction of 2008–2009 has run much of its course; the developers who were going to defer projects have largely done so, and the contractors who needed to reduce workforces have implemented those reductions. What remains is a leaner, more cautious sector operating at a level of activity that reflects the current demand environment rather than continuing to contract from higher historical baselines.

Government-mandated projects continue to provide the most predictable pipeline. HAJ schemes in the Greater Portmore area have continued to advance, and the government has signalled its intention to maintain delivery commitments on these units, recognising their importance to both housing supply and construction employment. Private developers in the affordable segment are watching the HAJ pipeline as a reference point for the market’s capacity to absorb new supply.

Tourism-linked construction — hotel rooms, resort facilities — remains essentially at a standstill. No significant new hotel development was initiated during the coverage period, and existing expansion projects on the north coast remain on hold pending clearer revenue recovery signals from the tourism sector. This represents a significant pipeline of potential construction activity that could absorb considerable labour and materials once conditions improve, but the timeline for that resumption is measured in years rather than months.

Investment Climate

Global risk appetite recovered further during August, with equity markets extending gains and credit spreads for emerging market borrowers tightening. Jamaica’s sovereign bonds participated in this broader improvement, reflecting the global pattern rather than any specific improvement in Jamaica’s domestic fundamentals. The IMF’s engagement with Jamaica on a potential support programme is being discussed — a programme, if agreed, would provide an external anchor for Jamaica’s fiscal adjustment and potentially improve the perceived risk environment for private investment.

For direct investment into real estate, the signal from improved financial markets is positive in direction but limited in immediate magnitude. International developers and investors who were interested in Jamaica before the crisis have not abandoned their interest; they are waiting for evidence that the macro environment has stabilised sufficiently to underwrite new commitments. That evidence is beginning to accumulate globally, but Jamaica-specific conditions — the currency, the fiscal position, the debt burden — require their own satisfactory resolution before capital flows resume at pre-crisis levels.

Diaspora and Remittances

The traditional August remittance pattern — a seasonal uptick associated with back-to-school expenses and summer family support — appears to have materialised modestly in 2009, even if at levels below prior years. Money transfer operators report that transaction volumes increased in the August window compared with May–June, consistent with the seasonal pattern. Whether this represents genuine recovery in sending capacity or simply the seasonal distribution of a reduced annual total remains to be determined from full-year data.

For housing, the key question is whether the August remittance uptick has been channelled toward property-related purposes. Anecdotal reports suggest that most seasonal remittance increases are absorbed by education costs — school fees, uniforms, books — rather than housing, which reflects the rational prioritisation of households under income pressure. Housing-specific remittances appear to remain at the suppressed levels observed through the first half of 2009.

Affordability

The affordability picture for the September review holds essentially the same coordinates as preceding months. Commercial rates at 14–18 per cent, NHT rates at zero to five per cent, loan ceilings at J$3.5–4.0 million, and median household incomes in the J$30,000–45,000 monthly range collectively produce a market where the NHT pathway is the only viable route to ownership for the overwhelming majority of Jamaican households.

One affordability consideration that merits attention is the impact of inflation on household purchasing power. Even as the CPI inflation rate has moderated from its 2008 peak, core living costs — food, transportation, utilities — have not declined commensurately with income. The real income of Jamaican households has eroded over the 2008–2009 period, compressing the residual income available for housing cost after essential expenditure. This erosion of real purchasing power is an affordability headwind beyond the headline mortgage rate comparison.

Looking Ahead

The October coverage period will be watched for evidence that the tentative improvement in external conditions — global markets stabilising, tourism showing marginal recovery — is beginning to filter through to Jamaica’s domestic economy. The government’s mid-year budget statement is expected to clarify the fiscal trajectory for the remainder of 2009–10. Any constructive development on the possible IMF programme would be an important signal for investor confidence.

For the housing market specifically, the key threshold event would be a BOJ rate reduction — even a modest one — that signals an easing cycle has begun. Commercial mortgage rates that move from 16 per cent to 14 per cent do not transform affordability overnight, but they restore marginal transactions that are currently just outside the boundary of viability. They also shift market psychology in a market where sentiment has been suppressed for the better part of a year. The housing sector is ready to respond to such a signal; the question is whether the macro conditions will permit the BOJ to provide one before year end.