Commercial bank mortgage rates fall below fourteen per cent for the first time since 2007, Treasury bill yields drop below ten per cent, the BOJ begins cautious easing, and property transaction volumes — still far below their 2005-2007 peak — show the first measurable increase in three years as buyers return to a market where sellers have finally repriced.
Highlights
- Treasury bill yields fall below 10 per cent as JDX compression continues through April
- Commercial bank weighted average lending rate begins declining from its 17 per cent peak
- IMF Stand-By Arrangement first review passed, confirming programme is on track
- NHT raises mortgage benefit limits to reflect post-depreciation property values
- US economic recovery strengthens; remittance flows begin modest recovery from 2009 trough
- GDP still contracting at 1.4 per cent for 2010, but construction sector shows stabilisation
The interest rate cycle that had driven Jamaica’s property market from boom through bust was finally reversing. Short-term Treasury bill yields, which had been above sixteen per cent as recently as December 2009, fell below the Bank of Jamaica’s ten per cent benchmark rate within weeks of the Jamaica Debt Exchange’s January completion. By the second quarter of 2010, the compression had worked its way into commercial bank pricing: the weighted average lending rate, which had held above sixteen per cent for most of 2008 and 2009, was trending lower. Mortgage rates for creditworthy borrowers at the major commercial banks were available, for the first time in three years, below fourteen per cent. This was not yet the single-digit territory that would produce a genuine market revival, but it was directional, durable, and visible to every buyer and seller who had been waiting for the cycle to turn.
The IMF Stand-By Arrangement’s first review, conducted in the second quarter, confirmed that the programme was on track. Jamaica had met its primary surplus target for the first quarter of the fiscal year, a significant achievement given the depth of the recession and the fiscal starting position it had inherited. The programme’s approval and its initial on-track performance were doing exactly what such programmes are designed to do: reassuring external creditors, compressing sovereign risk premia, and providing the exchange rate stability that allows domestic economic actors to make medium-term decisions without hedging against currency collapse.
The United States labour market, whose contraction had been the primary driver of remittance decline since late 2008, was beginning a slow recovery. US unemployment, which had peaked at ten per cent in October 2009, was edging lower through 2010 as employers in the construction, hospitality, and service sectors began cautious rehiring. The impact on Jamaica’s remittance inflows was modest and lagged — diaspora workers who had lost jobs and depleted savings needed time to rebuild their transfer capacity before resuming the monthly wire transfer patterns that had characterised the boom years — but the direction of travel was positive. Wire transfer data collected by the BOJ showed Q2 2010 flows modestly above the depressed 2009 levels.
The National Housing Trust, responding to the reality that three years of Jamaica dollar depreciation had pushed property values substantially higher in nominal terms, made adjustments to its mortgage benefit limits during the quarter. The maximum loan available to individual NHT contributors, which had been calibrated to property values prevailing in earlier years, was increased to better reflect the actual prices at which properties were trading in the post-depreciation market. This was a technical but practically important adjustment: it meant that more of the lower-to-middle income properties that dominated the Jamaica City and suburban market — particularly in St Andrew, St Catherine, and St James — could now be fully financed within NHT parameters, expanding the pool of viable NHT transactions.
In the real estate offices of New Kingston and Montego Bay, the second quarter produced a noticeable shift in market sentiment even if the transaction statistics remained modest. Properties that had been listed without offers for eighteen to twenty-four months were finding buyers at prices that both parties could accept. The distinguishing feature of these successful transactions was invariably a seller who had made a genuine psychological adjustment: who had accepted that the 2006 market was not returning in any actionable timeframe and had priced accordingly. The buyers on the other side were characteristically patient and cash-advantaged — individuals or families with equity from previous property sales, returned diaspora members, or local business owners who had avoided the highly leveraged positions of the boom years and now had capital to deploy at what they correctly understood as cyclically depressed prices.
The broader economy remained difficult. Full-year 2010 GDP would record a contraction of 1.4 per cent — a smaller decline than 2009’s 3.4 per cent, but still negative, confirming that Jamaica was in the eighth and ninth consecutive quarters of declining economic output. Unemployment was still rising, reflecting the lagged relationship between GDP and the labour market. The construction sector, which had contracted severely through 2008 and 2009, was showing early signs of stabilisation as some delayed NHT schemes restarted and a handful of commercial projects cautiously resumed. But new starts remained well below the levels that would be needed to absorb the tradespeople and labourers who had lost construction employment during the crisis years.
What This Means
The second quarter of 2010 is the first quarter in which recovery is not merely anticipated but measurable. Commercial lending rates are falling. Transaction volumes are rising from their historic lows. Sellers have repriced. Remittances are recovering. The IMF programme is holding. These are the conditions under which property markets heal — not quickly, and not uniformly, but genuinely. The six to eighteen month outlook is for continued gradual improvement in each of these indicators. The properties most likely to benefit first are those in the NHT-eligible range, where the trust’s adjusted limits and stable lending operations provide immediate support. Above that range, the commercial bank mortgage rate decline is the critical variable: each full percentage point reduction in the weighted average lending rate brings a new tranche of buyers into affordability, and with ten to fourteen per cent now the working range, the eligible population is substantially larger than it was at the crisis peak of sixteen to seventeen per cent.
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