In the Wreckage of the Global Recession: Jamaica’s Housing Market Absorbs Its Deepest External Shock

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

• Jamaica’s economy is contracting in 2009 as the global financial crisis reduces tourism arrivals, compresses remittances and tightens external financing conditions
• The Golding JLP government is negotiating with the IMF for programme support; discussions are advanced but a formal agreement has not been announced
• Commercial mortgage rates remain very high; the formal housing market is effectively inaccessible to working Jamaicans without NHT support
• NHT contribution income has been affected by rising unemployment but the Trust’s reserves have allowed it to maintain its mortgage function
• Remittances, the lifeblood of informal housing construction, fell in 2009 for the first time in years as diaspora Jamaicans faced their own economic pressures
• The construction sector has contracted sharply; developer confidence is low and new affordable housing completions are minimal

The global financial crisis of 2008, whose most acute phase arrived with the collapse of Lehman Brothers in September of that year, has delivered its full weight to Jamaica’s economy through 2009. The channels of transmission are familiar: tourism, the island’s largest foreign exchange earner, has declined as American and British visitors reduced discretionary travel in a recession; remittances, the financial link between Jamaica and its diaspora, fell in early 2009 as diaspora Jamaicans in the United States and United Kingdom faced their own job losses and income pressures; external financing costs rose as global risk aversion increased and Jamaica’s sovereign risk premium widened.

For the housing market, these channels translate into specific and measurable deprivation. Formal sector employment has contracted, reducing the NHT contribution base and the income that supports mortgage serviceability. Informal construction, normally sustained by remittances, has slowed as diaspora flows decreased. Commercial mortgage volumes have declined as banks tightened credit standards in response to economic deterioration. And the pipeline of new formal housing supply — already inadequate before the crisis — has been further reduced as developers find finance impossible to secure at commercially viable rates.

The Remittance Fall: A Structural Shock to Informal Housing

Jamaica’s informal housing sector — the vast network of incremental, self-built homes that provide shelter for perhaps half the island’s population — is financed primarily by diaspora remittances. When remittances fall, construction slows, extensions are deferred and the quality of existing informal stock declines as maintenance is deferred. The 2009 remittance decline is the first significant fall in years, and its effects on informal housing activity are real if difficult to quantify. The communities that build room by room, block by block, as money arrives from England or New York, are building more slowly in 2009. The aggregate consequence, spread across hundreds of thousands of households, is a meaningful reduction in the informal housing investment that normally partially compensates for the formal sector’s chronic undersupply.

NHT Under Pressure

The National Housing Trust entered the global crisis with adequate reserves and a sound institutional position. Two years into the crisis, some of that cushion has been absorbed. Contribution income has declined as formal sector employment contracted. The Trust’s loan arrears rate has risen modestly as some borrowers face payment difficulty in a tighter income environment. The NHT remains functional and disbursing; it has not been forced to suspend operations or dramatically reduce its lending activity. But the margin that the Trust’s reserves provided before the crisis has thinned, and the Trust’s management has been appropriately conservative about loan limit increases in this environment.

The IMF Negotiations: Housing’s Macro Context

The Golding government has been in discussions with the IMF for the better part of the year, seeking programme support that would backstop Jamaica’s fiscal position and signal to markets that the country’s trajectory is credibly controlled. An agreement has not yet been concluded; the negotiations have involved difficult discussions about the primary surplus targets, wage bill restraint and the domestic debt restructuring that the Fund has indicated is a precondition for programme support. That discussion about domestic debt — about what form it will take and what it will cost the financial sector — is adding to the uncertainty that suppresses investment and mortgage market activity.

What This Means

For NHT contributors, October 2009 reinforces the importance of maintaining contributions even through economic difficulty. The NHT’s rates — subsidised, administered, insulated from the commercial rate environment — represent value that is not otherwise accessible. Reducing or suspending contributions to ease short-term cash flow reduces long-term mortgage eligibility in ways that are difficult to reverse.

For the diaspora, the 2009 remittance decline is understandable but worth noting: the Jamaican dollar’s weakness against the US dollar and British pound means that each dollar or pound sent buys more housing construction in Jamaica than it did before the crisis. The foreign exchange opportunity embedded in remittance-funded construction has rarely been better, even if the absolute capacity to send has been reduced.

The Outlook: Waiting for the Rescue to Arrive

Jamaica’s housing market in October 2009 is waiting for the crisis to resolve in a way that creates the foundation for recovery. The IMF discussions, when concluded, will establish the macro framework. The debt restructuring that is expected to accompany an IMF agreement will, over time, create the lower interest rate environment that affordable mortgage finance requires. The global recession will eventually turn, restoring tourism and remittance flows. These recoveries are coming. They are not yet here. October 2009 is still very much a crisis month, and the housing market, bruised and constrained, endures.

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

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