Haiti Shakes the Region: Seismic Risk, Building Standards and Jamaica’s Housing Sector — February 2010

Publication Date: 3 February 2010 | Coverage Period: 3 January – 2 February 2010 | Category: Monthly Review

January in Brief

• Haiti earthquake of magnitude 7.0 on January 12 devastates Port-au-Prince; 230,000+ reported dead, 1.5 million displaced.
• Jamaica Debt Exchange launched January 14; approximately J$700 billion in domestic bonds offered for voluntary swap.
• IMF Stand-By Arrangement approved; Jamaica formally enters fiscal consolidation programme.
• Enriquillo-Plantain Garden fault — shared by Haiti and Jamaica — draws international attention to Kingston’s seismic risk.
• JDF and emergency services deployed to Haiti; Jamaican diaspora in Haiti deeply affected by catastrophe.
• Remittances to Jamaica for Q1 2010 show early signs of recovery; up approximately 10 percent year-on-year.

The Haiti Earthquake: Regional Shockwaves for Housing

The earthquake that struck Haiti on 12 January 2010 — magnitude 7.0, epicentre near Port-au-Prince — is the defining event of the month and, perhaps, of the year for the Caribbean region. With more than 230,000 people reported dead, 1.5 million displaced, and virtually the entire housing stock of Port-au-Prince either destroyed or severely damaged, the catastrophe has forced the Caribbean world — Jamaica included — to confront questions about seismic vulnerability that policymakers and developers have long preferred to treat as theoretical.

The Enriquillo-Plantain Garden fault system, which ruptured in the January 12 event, extends westward from Hispaniola through Jamaica. Kingston sits at the intersection of several active fault lines, and geologists have long warned that the Jamaican capital faces seismic risk broadly comparable in character, if not in immediacy, to that which claimed Port-au-Prince. A magnitude-7.1 earthquake destroyed much of Kingston in 1907 — a historical fact that carries renewed resonance in the weeks following Haiti’s catastrophe.

The central lesson emerging from Haiti’s ruins is the critical role of building quality and code enforcement in determining earthquake mortality. Post-event assessments by international engineering teams have found that even structures built to minimal modern specifications fared dramatically better than the unregulated concrete construction that predominated across Port-au-Prince’s informal settlements. Where buildings met international seismic design standards — including some built by international NGOs — survival rates were markedly higher.

Jamaica’s Building Standards in the Spotlight

The Haiti earthquake has landed with particular force in conversations about Jamaica’s own building code and its enforcement. Jamaica has had a National Building Code since 1983, with provisions for seismic design that are broadly appropriate to the island’s risk profile. The persistent concern, however, is enforcement: in the informal and semi-formal construction that accounts for a significant share of Jamaica’s housing stock — particularly in inner-city Kingston and in rural self-build construction across the parishes — code compliance is inconsistent at best.

Housing experts and structural engineers contacted by this review note that the greatest vulnerability in Jamaica’s housing stock lies not in formally built NHT or developer schemes, which are generally subject to planning approval and inspection, but in the estimated several hundred thousand dwelling units constructed without formal permits, engineered foundations or seismic detailing. These units — found in communities such as Dunkirk, Trench Town, August Town and across the rural parishes — represent both Jamaica’s greatest housing challenge and its greatest seismic liability.

The Bureau of Standards Jamaica, the responsible body for the National Building Code, has been urged by technical observers to use the Haiti aftermath as the impetus for a national public education campaign and a renewed push for code compliance in local government planning departments. Whether the political will and the fiscal resources exist to mount such a campaign in the current environment remains to be seen.

The Jamaica Debt Exchange: A Turning Point for Fiscal Policy

Two days after the Haiti earthquake, on 14 January, the Government of Jamaica launched the Jamaica Debt Exchange — a voluntary (in form if not entirely in spirit) restructuring of approximately J$700 billion in domestic bonds. Under the terms of the JDX, holders of government securities were invited to swap existing bonds for new benchmark instruments carrying lower coupon rates and extended maturities. The exercise is designed to generate interest savings equivalent to approximately 3.5 percent of GDP, and to reduce the volume of maturing government debt over the next three years by approximately 65 percent.

The JDX was a condition precedent to the IMF Stand-By Arrangement, which has now been formally approved. Together, these twin fiscal measures represent the most consequential restructuring of Jamaica’s public finances in years. For the housing sector, the significance lies primarily in the downstream effect on interest rates: by reducing the government’s own borrowing costs and its demand for domestic liquidity, the JDX creates the conditions under which the Bank of Jamaica can begin to ease its policy rate. Lower BOJ rates are a necessary, if not sufficient, precondition for lower commercial mortgage rates.

The immediate effect on NHT rates is modest: the Trust’s subsidised lending is not directly determined by BOJ rates, and its fiscal arrangements are governed separately. But for the estimated 60 to 70 percent of housing-finance demand that falls outside the NHT’s reach — households who require commercial mortgage finance to bridge the gap between NHT loans and actual property values — the JDX represents genuine hope that the rate environment may begin to normalise in the months ahead.

Housing Market

January is traditionally the quietest month in Jamaica’s property transaction calendar, and 2010 proved no exception — with the additional factors of the Haiti earthquake, the JDX launch and a national mood of sober reflection contributing to unusually subdued activity. Agents report that enquiries have been maintained but that buyers are deferring decisions pending greater clarity on the interest rate outlook in the wake of the JDX. Sellers in the upper bracket continue to make concessions, with asking price reductions of 10–15 percent increasingly common on properties listed since 2008.

The rental market continues to absorb displaced would-be buyers. In Kingston’s residential suburbs and in Montego Bay’s worker housing corridors, vacancy rates remain low and landlords are testing modest rent increases after a year of holding firm. This dynamic reflects an underlying demand for housing that is real and pressing but that cannot find expression in the ownership market at current financing costs.

Government Policy and the NHT

The NHT has maintained its lending programmes through the January transition period. With the IMF programme now in place and the JDX completing the restructuring of the government’s domestic debt obligations, there is guarded optimism that the fiscal environment facing the Trust will stabilise rather than deteriorate further. NHT housing schemes under construction in Portmore, St Catherine and sections of Clarendon continue to advance, providing a modest flow of new affordable units to a market that desperately needs them.

Diaspora Response to Haiti

The Haitian diaspora community in Jamaica has been directly affected by the earthquake, with hundreds of Haitian nationals living and working on the island having lost contact with family members in Port-au-Prince. The Jamaican government has extended humanitarian assistance and deployed JDF medical and logistics personnel to Haiti as part of the Caribbean regional response. This act of solidarity reflects the deep institutional and human ties that connect Jamaica to its regional neighbours, even as the two countries’ development trajectories have diverged sharply over recent decades.

The Haiti earthquake will not materially alter Jamaica’s housing market in the near term. Its significance for this sector lies in the domain of building standards, seismic risk awareness and the long-term question of whether Jamaica’s construction industry — and the regulatory bodies that oversee it — will use this moment to improve the resilience of the island’s housing stock against the seismic hazard that geologists have long documented.

Remittances

Early Bank of Jamaica data for Q1 2010 indicates that remittance inflows are running approximately 10 percent above the same period in 2009, suggesting that the recovery in US labour markets and diaspora household finances is beginning to translate into restored capacity to send money home. This is a meaningful positive for Jamaica’s housing sector, given the historical role of remittances in funding construction, land purchase and home improvement, particularly in rural parishes.

Affordability and Rates

Commercial mortgage rates remain in the 13–15 percent range as of early February, unchanged from late 2009. The JDX has created the conditions for eventual rate reduction but the transmission to retail lending rates will take time. Commercial banks, which themselves hold substantial government bond portfolios and are adjusting to the new yield environment created by the JDX, will need to recalibrate their funding costs before passing savings on to borrowers. Market participants expect the rate-easing process to begin in the second or third quarter of 2010 at the earliest.

Looking Ahead

February brings two extraordinary stories into sharp juxtaposition. The Haiti earthquake has made the case for investment in building quality and seismic resilience with terrible force; the Jamaica Debt Exchange has, for the first time in years, created a credible pathway toward the lower borrowing costs that Jamaica’s housing sector needs to function. Neither story will resolve quickly: building standards reform requires sustained political will and institutional capacity, while the rate-easing cycle that the JDX enables will take months to reach retail mortgage markets.

For Jamaica’s housing sector, 2010 has opened with greater policy clarity — the IMF programme, the JDX, the Haiti-prompted focus on building codes — than was visible twelve months ago. The translation of that clarity into improved conditions for homebuyers, developers and communities in housing need will be the critical test of the coming months.