IMF Talks and Debt Pressures Shape Jamaica’s Property Market Horizon — October 2009

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

Month in Brief

• Jamaica–IMF negotiations advancing; a Stand-By Arrangement is increasingly anticipated.
• Jamaica’s sovereign debt profile under close scrutiny as fiscal metrics continue to deteriorate.
• US economy showing clearer recovery signs; global markets sustaining July–August gains.
• BOJ holds policy rate; Jamaica dollar weakening gradually toward J$92 per US dollar.
• North coast tourism showing marginal improvement as H1N1 anxiety fades from headlines.
• NHT loan processing continues steadily; private mortgage market activity minimal.

Housing Market Conditions

The September coverage period extended the pattern that has characterised Jamaica’s housing market throughout 2009: subdued transaction volumes, extended marketing periods for mid-to-upper market properties, a rental sector operating at capacity, and a sub-J$4 million segment that retains demand but lacks supply. No material departure from these conditions was evident through the coverage window.

The approach of the school term in September — traditionally a period when families make location decisions to be near quality educational institutions — generated some enquiry activity in residential districts of St. Andrew, particularly areas proximate to established preparatory and secondary schools. This demand is real but highly price-sensitive, and in most cases it resolves into rental rather than purchase, given the financing constraints facing even professional-class buyers.

In the upscale segment, a degree of price discovery is occurring through the mechanism of extended negotiation. Sellers of properties above J$15 million who entered 2009 with firm price convictions are encountering the reality of a market in which their buyer pool has contracted dramatically. Several transactions have closed at ten to fifteen per cent below initial asking price, setting informal precedents that are beginning to recalibrate vendor expectations across the segment.

The commercial real estate market offers a useful parallel. Office and retail vacancy in Kingston has increased through 2009, and rental rates for commercial premises have softened. Some tenants are using lease renewal moments to renegotiate materially lower rents, a dynamic that will eventually compress capital values for commercial property. The residential market is following a similar trajectory with a lag, as owner-occupancy insulates sellers from the market-clearing pressures facing commercial landlords.

Government Policy

The IMF engagement is the dominant policy development of the coverage period. Jamaica’s fiscal metrics — a debt-to-GDP ratio in the vicinity of 120 per cent, interest payments consuming more than half of tax revenue — have made external support necessary. The terms of any Stand-By Arrangement will include fiscal adjustment commitments and structural reform conditionality. For the housing market, the most relevant conditionality will be any that affects public capital spending on housing and infrastructure.

The National Housing Trust, as a self-funding statutory body, is largely insulated from the direct fiscal adjustment required of the central government. This makes the NHT an even more important instrument of housing policy in the current environment: it can continue to disburse housing loans while the government’s own capital budget is under pressure. Industry groups have renewed their advocacy for a ceiling revision, and the upcoming NHT board cycle is expected to address this question with the actuarial work completed.

The Bank of Jamaica’s monetary policy stance remains tight. The IMF engagement, paradoxically, may over time create conditions for modest monetary easing: a credible external anchor for fiscal adjustment tends to reduce the currency risk premium embedded in Jamaican interest rates. If the IMF programme is agreed and begins to stabilise Jamaica’s credit metrics, there is a plausible path toward lower commercial interest rates over 2010 — a development that would be profoundly positive for housing market activity.

Construction Sector

Construction activity in September remained at the subdued levels established earlier in 2009. The sector’s output is now running approximately 20–25 per cent below its 2007 peak by most measures, a contraction that has been concentrated in private residential and commercial development rather than government-sponsored affordable housing.

A notable development in the September period was the announcement by a private developer of plans to recommence a previously suspended residential scheme in the St. Catherine corridor. The developer cited confidence in the NHT-eligible market segment and the continued existence of an undersupplied affordable housing market as the rationale. The project — a phased development of two- and three-bedroom units priced within NHT loan parameters — is not expected to break ground until Q1 2010, but the commitment signals cautious optimism from at least one private developer that the market bottom has been reached.

Material cost inflation remains a concern. Oil’s sustained recovery toward the US$70 range is working its way through transportation and energy-intensive material costs. Cement prices have edged upward in the September period, and this is being noted with concern by affordable housing developers whose feasibility calculations leave limited room for cost escalation. The margin between construction cost and NHT-financeable sale price in the affordable segment is thin and narrowing.

Investment Climate

The G20 summit in Pittsburgh in late September produced communiques affirming coordinated global economic recovery support and signalling that stimulus measures would be maintained until recovery was assured. For small open economies like Jamaica, the G20 stance matters primarily through its effect on global trade, tourism, and capital flows rather than through any direct mechanism. A sustained global recovery that lifts US consumer confidence and spending is the single most important external variable for Jamaica’s economic outlook.

For real estate investment, the most concrete positive signal of the period is the improvement in Caribbean hotel performance data for August. Several major Jamaican properties reported occupancy improvements in their peak season compared with the April–June trough. While aggregate tourism arrivals for the full year will be materially below 2008, the stabilisation of tourism performance is a precondition for resuming hotel development and for rehabilitating the north-coast residential property market that is linked to hospitality employment and visitor buyer activity.

Diaspora and Remittances

The Bank of Jamaica’s quarterly remittance data for Q2 2009, now available, confirms the decline anticipated from earlier monitoring. Flows fell approximately ten per cent year-on-year in the quarter, consistent with the pattern of reduced sending capacity in the major diaspora markets. The US unemployment rate, which reached 9.8 per cent in September, continues to affect the Jamaican diaspora concentrated in construction, hospitality, and domestic service sectors.

The housing market implication is unchanged from prior months: a meaningful share of the buyer pool for Jamaican residential property — particularly the working-class and lower-middle-income segments — depends on remittance contributions for the down payment and deposit component of home purchase. Until remittance flows stabilise and recover, this demand segment will remain constrained beyond what the commercial mortgage market constraint alone would imply.

Affordability

The October affordability survey finds the same structural barriers in place. Commercial mortgage rates continue to price the majority of Jamaican households out of ownership. The NHT pathway remains the primary viable route for the formal workforce. The gap between NHT loan ceilings and the cost of new affordable construction is narrowing as material costs rise, adding urgency to the ceiling revision discussion.

One underappreciated affordability mechanism is the role of serviced land rather than completed housing. Households that can acquire a serviced lot — with road access, water and sewerage connection — within the NHT financing envelope can then build incrementally, a traditional Jamaican approach to housing that avoids the need for a single large financing event. The government’s continued investment in serviced land development in growth corridors supports this approach, and expanding the supply of serviced lots within NHT-eligible price ranges is a direct affordability intervention that merits prioritisation.

Looking Ahead

The November coverage period will bring the IMF programme negotiations to what may be a conclusion, or at least to a point of public clarity on the terms and conditionality. The housing market will watch closely for any provisions affecting NHT operations, public housing investment, or fiscal adjustment paths that might influence private sector confidence.

The US economy’s recovery trajectory is becoming an important near-term variable. Q3 GDP data, due in late October, is expected to show the US returning to positive growth for the first time in five quarters. If confirmed, this would provide the clearest signal yet that the global recession is ending — a development that would gradually flow through to Jamaica’s tourism, remittance, and investment channels. The housing market’s recovery, when it comes, will be a lagged consequence of this broader improvement. Patience and structural resolve on the supply side are the appropriate posture for market participants through the final quarter of 2009.