The Debt Exchange and the Garrison: Jamaica’s Housing Market Navigates an Extraordinary Season

Jamaica Homes Housing Affordability & Cost of Living Review — July 2010

• The Jamaica Debt Exchange was completed five months ago; the fiscal savings are flowing to the primary surplus but commercial mortgage rates have not yet meaningfully declined
• The state of emergency in West Kingston in May, and the subsequent Tivoli Gardens operation that led to Christopher Coke’s extradition, has dominated Jamaica’s public life and damaged its external image
• Tourism, already weakened by the global recession, has suffered further from the security coverage; resort-area property markets feel the consequences
• NHT continues its mortgage function without interruption; contribution income is resilient as formal sector employment holds at pre-crisis levels in key sectors
• Commercial banks remain cautious lenders; the JDX’s reduction of their government bond income has not yet translated into appetite for mortgage book expansion
• Diaspora remittances continue to support informal housing construction across the island, with the Jamaican dollar weakening modestly adding to diaspora purchasing power

Jamaica’s July 2010 housing market review cannot be written without acknowledging the context that has defined the island’s public life for the past two months: the state of emergency declared in Kingston and St Andrew, the military and police operation in the Tivoli Gardens community, and the extradition of Christopher Coke to the United States in June. These events, and the weeks of tense preparation that preceded them, have consumed Jamaica’s national attention in a way that makes discussion of mortgage rates and development viability feel almost frivolous by comparison. But the housing market exists within the society that hosts it, and a society under security emergency is not one in which housing transactions proceed normally.

The immediate economic consequences of the Tivoli crisis are visible in reduced consumer confidence, softening tourism bookings and a general deferral of economic decisions that accompanies any period of political and security instability. For the housing market specifically, the effects are being felt in the commercial segment: buyers who might have been moving toward a transaction in May or June have held back, waiting for stability to return before committing to what may be the largest financial decision of their lives. The NHT segment has been more resilient; the decision to apply for an NHT mortgage is more mechanical than sentimental, and eligibility-based demand has continued at a steady pace.

Five Months of the JDX: What Has Changed

The Jamaica Debt Exchange, completed in February 2010, represented a fundamental change in the financial relationships between the government and its domestic creditors. Banks, insurance companies and pension funds that had relied on high-coupon government bonds for predictable income now hold a portfolio of lower-yielding instruments with extended maturities. The adjustment to this new reality is still unfolding. Institutions that had built their cost structures around the bond income they previously received are reviewing their business models, their staffing costs and their lending strategies in light of the new yield environment.

The mortgage market consequence has been, thus far, a freeze rather than a thaw. Banks that are reconfiguring their income mix are not in an expansionary mode for mortgage lending. The JDX created the macro conditions for lower mortgage rates but did not immediately create the institutional appetite for mortgage book growth. That appetite will return as banks adapt, as the macro environment stabilises and as the recovery of confidence that the IMF programme’s success eventually enables materialises. In July 2010, it has not yet returned.

Resort Property: Summer Under Pressure

The summer tourist season in Jamaica’s resort communities is typically the most important economic period of the year for the communities and properties that serve it. In 2010, the Tivoli coverage has cast a shadow over what was already going to be a modest summer, given the lingering effects of the global recession on travel patterns in Jamaica’s key source markets. Montego Bay, Ocho Rios, Negril and Port Antonio are all feeling the pressure of reduced visitor numbers relative to the pre-recession peak. For residential property in these communities — vacation rentals, boutique guesthouses, investment apartments that serve the tourism economy — the revenue shortfall is real and immediate.

The longer-term structural case for resort-area property investment in Jamaica remains intact. The island’s natural assets — its climate, its coast, its culture — are permanent attractions that no individual crisis erases. Tourism recovers; the history of the sector globally demonstrates that destination-market investors who hold through crisis cycles are ultimately rewarded. But holding through the cycle requires financial resilience that not every property investor possesses, and some forced sales are likely in resort communities through the remainder of 2010.

What This Means

For first-time buyers with NHT eligibility, the Tivoli crisis is not a reason to abandon a transaction that made sense before it. The NHT’s rates and eligibility criteria are unchanged. Properties in established residential communities outside the affected areas are transacting at reasonable valuations. If the financial fundamentals of a proposed purchase were sound in April, they remain sound in July.

For resort-area investors, the current weakness in tourism-linked property values creates entry points that the next cycle of tourism growth will validate. The investment case requires confidence in Jamaica’s medium-term tourism recovery and the financial capacity to carry a property through a period of reduced income. For investors with both, this summer’s soft valuations represent an opportunity.

The Outlook: After the Storm, a Slow Return to Normal

Jamaica’s housing market in July 2010 is managing the interaction of a macro adjustment — the JDX and its fiscal consequences — with a domestic security crisis whose economic fallout is still being assessed. The two together have created a market environment of unusual difficulty. But neither represents a permanent deterioration of the conditions that will eventually support housing market recovery. The JDX’s fiscal work is proceeding. The Tivoli crisis will recede from the international headlines. Jamaica’s fundamental assets as a destination for tourism, diaspora investment and residential living remain intact. The road back to normal is slow and the summer of 2010 will be remembered as one of the harder stretches along it.

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

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