Publication Date: 3 March 2010 | Coverage Period: 3 February – 2 March 2010 | Category: Monthly Review
February in Brief
- Jamaica Debt Exchange closes in February with high participation rate; domestic debt restructuring successfully completed.
- Government interest bill reduced by estimated 3.5 percent of GDP; significant fiscal breathing room created.
- Bank of Jamaica signals rate-easing cycle may begin; commercial banks monitoring liquidity conditions post-JDX.
- NHT loan disbursements continue steadily; construction at social housing schemes in St Catherine progresses.
- Remittance inflows sustain early recovery momentum; Q1 up approximately 10 percent over year-ago levels.
- Christopher Coke extradition controversy continues to shadow government; US-Jamaica diplomatic tensions persist.
The JDX: A Completed Landmark
The Jamaica Debt Exchange, launched on 14 January 2010 and now closed with a reported participation rate that has exceeded government targets, represents the most significant restructuring of Jamaica’s public finances in the modern era. By swapping approximately J$700 billion in existing domestic bonds for new benchmark securities carrying lower coupon rates and extended maturities, the government has materially altered the fiscal arithmetic that has constrained policy across virtually every sector of the economy for more than a decade.
The numbers are striking: yields on 15-year government bonds have declined to approximately 13.5 percent from their end-2008 level above 19 percent. The reduction in the government’s annual interest bill is estimated at the equivalent of 3.5 percent of GDP — a structural saving that, if sustained, will free up fiscal resources for capital investment in infrastructure, social programmes and, potentially, housing.
For Jamaica’s housing finance system, the JDX’s significance operates through several channels. Most directly, the reduction in government bond yields removes the dominant alternative investment that has historically attracted capital away from productive lending. Commercial banks and building societies that previously held government paper yielding 19–20 percent had little incentive to compete aggressively for mortgage business at lower rates. As government yields decline, the relative attractiveness of mortgage lending — with appropriate risk pricing — improves.
The Rate-Easing Pathway
The Bank of Jamaica’s policy rate has been a critical — and frustrating — factor in Jamaica’s housing market for several years. Maintained at approximately 7.5–8.5 percent through 2009, the BOJ rate anchored commercial base lending rates above 20 percent, rendering commercial mortgage finance accessible only to high-income households or purchasers of properties whose values could sustain the associated debt service. The JDX has provided the BOJ with the fiscal context it needed to contemplate rate reduction: with government demand for domestic liquidity falling and inflationary pressures broadly contained, the conditions for easing are assembling.
Market participants and commercial bankers, when consulted for this review, are cautiously optimistic that the BOJ will begin to move rates lower in the second half of 2010. The lag between policy rate reductions and actual commercial mortgage rate cuts is typically several months in the Jamaican system, reflecting the time required for banks to reprice their deposit and funding books. A BOJ rate cut in, say, the third quarter would not be expected to feed through to mortgage rates until the fourth quarter at the earliest. But the direction of travel, for the first time in years, appears to be downward.
Housing Market
February’s residential property market showed the first tentative signs of improved buyer sentiment in several months. Agents in the Kingston metropolitan area and in the major resort corridors report an uptick in enquiries from serious buyers who are willing to commit subject to confirmation that financing conditions will improve in the second half of the year. This conditional interest is not yet translating into completed transactions at scale, but it suggests that a significant pocket of latent demand exists in the market — demand that has been suppressed by rate conditions rather than extinguished by weak economic fundamentals.
In the upper bracket, the price correction that began in 2008 continues to run its course. Properties above J$40 million in suburban Kingston and the hills above Montego Bay and Ocho Rios remain on the market longer than at any time in recent memory, and sellers who entered 2009 with unrealistic asking prices have progressively adjusted their expectations. The correction is generally orderly — there is no sign of the distressed sales or foreclosure dynamics that characterise the US housing market — but it is real and it is ongoing.
NHT Activity
The National Housing Trust’s lending operations have continued without disruption through the JDX period, reflecting the Trust’s structural separation from the commercial banking system and its ability to maintain its contribution-funded lending independently of market rate fluctuations. NHT-financed schemes in Portmore, Naggo Head, Hellshire and sections of St Catherine continue to deliver completed units, with waiting lists for affordable NHT properties remaining long in all parishes.
The fiscal savings generated by the JDX do not directly flow to the NHT, whose funding model is based on mandatory employer and employee contributions rather than government bond revenue. However, the creation of fiscal space at the government level does open the possibility of enhanced capital contributions to social housing programmes, including the Housing Agency of Jamaica, in future budgets. Housing advocates have been pressing the government to commit to increased social housing output as a component of its IMF-framed fiscal programme, arguing that housing investment generates employment, reduces deficit spending on informal settlement services, and addresses the 100,000-unit structural deficit that represents one of Jamaica’s most persistent development failures.
Construction Sector
Private residential construction remains subdued, with most developers in a holding pattern pending clearer signals on the interest rate trajectory. The decision to launch a new housing scheme in the current environment involves a significant forward assumption about the financing conditions that will prevail by the time units are sold — typically 18 to 36 months after groundbreaking. Developers who expect the JDX-linked rate reduction to materialise meaningfully by late 2010 or 2011 are beginning to advance pre-development work: site surveys, planning submissions and utility engagement, in anticipation of a construction decision later in the year.
Building material costs have remained relatively stable through the February period, with imported cement and steel prices anchored by the continued weakness in global commodity markets. This provides a constructive cost environment for any developer prepared to move, and suggests that the constraint on new supply is firmly on the demand and financing side rather than on construction cost.
Political Context: Extradition Controversy
The government’s handling of the United States’ extradition request for Christopher Coke — the alleged leader of the Shower Posse, submitted by Washington in October 2009 — continues to create an undercurrent of political uncertainty that investment professionals note as a negative factor for the broader business climate. Prime Minister Golding’s resistance to the extradition request, which is widely attributed to the JLP’s historical relationships with the political strongholds of west Kingston, has generated criticism from business associations and from sections of the press that concern about diplomatic relations with Jamaica’s largest trading partner ought to weigh heavily in the government’s calculus. Investors considering long-term commitments to Jamaica — including real estate development — are watching the situation with quiet unease.
Diaspora
Remittance flows have continued their early-2010 recovery, with Bank of Jamaica data suggesting that inflows in January and February are running ahead of the same period in 2009. Diaspora housing investment — both in home construction and in land purchases — is beginning to show tentative signs of recovery after the sharp 2009 downturn, though it remains well below the volumes recorded in the pre-crisis peak years of 2006–2007.
Affordability
The JDX’s completion does not alter affordability in the short term — commercial mortgage rates remain at 13–15 percent and the NHT loan ceiling remains at approximately J$3.5 million. What has changed is the credible expectation that rates will trend lower over the course of 2010, which may be sufficient to encourage a subset of buyers who had been deferring their decisions to re-enter the market in the second half of the year. This forward-looking shift in buyer psychology, while not yet reflected in transaction data, is detectable in agent sentiment across the major market centres.
Looking Ahead
The successful completion of the JDX marks a genuine inflection point in Jamaica’s macro-economic trajectory, and its implications for the housing sector are meaningful even if they are not immediate. The path to lower mortgage rates is now visible, if not yet proximate. The fiscal space created by the debt exchange opens the possibility — not yet realised — of greater public investment in housing and infrastructure. And the IMF programme provides the external anchor that long-horizon investors have been waiting for.
The remaining uncertainties are real: the extradition controversy and its potential to damage US-Jamaica relations; the pace of the BOJ’s rate-easing cycle; the ability of the NHT and HAJ to translate fiscal space into actual housing units on the ground. For Jamaica’s 100,000-plus households living in housing deficit, the JDX is a necessary condition of improvement — but it is emphatically not, by itself, sufficient.
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