Post-JDX Jamaica: Rate Relief Begins to Filter Through the Mortgage Market — August 2010

Publication Date: August 3, 2010 | Coverage Period: July 3–August 2, 2010 | Category: Monthly Review

July in Brief

• The Bank of Jamaica continued its gradual monetary easing trajectory, with overnight policy rates declining from post-JDX highs toward the 7% range.
• Kingston’s property market registered modest improvement in July as the immediate post-Dudus crisis anxiety began to dissipate; transaction volumes remain below 2008 levels.
• Commercial banks signalled intent to pass on lower funding costs to borrowers, though retail mortgage rate reductions have yet to materialise in significant measure.
• National Housing Trust continued strong loan activity, with July approvals reportedly tracking above the equivalent month in 2009.
• Tourism arrivals to Montego Bay and Ocho Rios climbed in July, supporting short-term rental and villa market recovery in resort corridors.
• Construction materials costs remain elevated, constraining new residential supply despite improving demand signals.

Housing Market Overview

Jamaica’s housing market enters August in a tentatively improved state compared to the depths of the Tivoli Gardens crisis in May and June. The arrest and extradition of Christopher Coke has removed the most acute source of investor uncertainty, and property agents in Kingston report that viewings and enquiries have resumed at a pace closer to normal. Transaction volumes, however, remain constrained by the fundamental affordability barrier: commercial mortgage rates at 11–13% are simply out of reach for many Jamaican households, and the macroeconomic recovery — with GDP still contracting in real terms or at best flat — has not yet generated the income growth that would expand the effective pool of buyers.

The more optimistic reading of the market, advanced by several industry participants, is that the Jamaica Debt Exchange’s effects on the broader interest rate environment are beginning to transmit, albeit slowly, through the financial system. The 91-day treasury bill rate had declined to approximately 8.5% by late June, and the spread between government borrowing costs and retail mortgage rates — historically wide in Jamaica — cannot indefinitely resist compression as competition among lenders intensifies. The question is one of timing: most analysts expect meaningful retail rate reductions to materialise in the fourth quarter rather than the third.

In the meantime, the market’s activity is concentrated in the segments least dependent on commercial financing. Cash buyers — many of them diaspora purchasers or Jamaicans with accumulated savings — have been the most active participants in the upper end of the residential market. The NHT continues to dominate the middle and lower segments, where its concessionary rates of 0–5% remain the only viable financing option for most aspiring homeowners.

Government Policy and NHT Activity

The Golding administration’s political difficulties have not materially disrupted the operational cadence of Jamaica’s housing policy institutions. The NHT has maintained its lending schedule through both the Dudus crisis and the broader economic challenges of 2010, a reflection of the institutional resilience built up over the Trust’s nearly four decades of operation. NHT loan approvals for July are expected to show year-on-year improvement, driven by strong demand from contributor households in parishes outside Kingston.

The Housing Agency of Jamaica is progressing, albeit slowly, with land titling programmes in several rural parishes. Land titling — converting informal occupancy into formal, mortgageable property rights — remains one of the most cost-effective interventions available to the government in expanding the base of potential property owners. Estimates suggest that tens of thousands of Jamaicans occupy land without formal title, a structural barrier to wealth accumulation and housing investment that the HAJ’s titling programme is designed to address over the medium term.

Construction Sector

The construction sector remains below the levels of activity seen in 2007–2008, the peak of the previous cycle, but there are signs of stabilisation. Cement imports — a useful leading indicator for construction activity — showed modest improvement in the second quarter. Steel and lumber prices, having risen sharply in the commodity supercycle years, remain at elevated levels that compress developer margins and limit the viability of new projects at price points accessible to middle-income buyers.

Several developers in the greater Portmore and Spanish Town areas are reported to be advancing plans for new residential schemes targeted at NHT-eligible buyers. These projects, which typically rely on the NHT for end-financing of individual units, are better positioned than commercial-rate-dependent development to move forward in the current environment. The pipeline for such schemes in St Catherine parish looks comparatively healthy for 2011 delivery.

Major Developments

The July period saw continued international focus on Jamaica’s governance record following the Coke affair, with both the US State Department and the Inter-American Development Bank indicating that improved transparency and anti-corruption measures would be important signals to regional creditors and investors. For the property market, the practical implication is that foreign institutional investment in Jamaican real estate — which had never been substantial — is unlikely to increase in the near term absent a clear demonstration of institutional improvement.

Domestically, the Tivoli Gardens reconstruction question remains unresolved. Community leaders in West Kingston have continued to press the government for a clear timeline and funding commitment. Some J$500 million in emergency relief had been discussed in parliamentary committees, but no formal appropriation had been made as of end-July. The delay is generating political pressure from opposition PNP members who have been vocal in highlighting the contrast between the government’s rapid deployment of security forces and its slower response to community rehabilitation.

Infrastructure

Infrastructure spending outside the crisis zone continued at a measured pace in July. The National Works Agency reported progress on road maintenance programmes in several parishes, though the capital budget remains constrained. The Urban Development Corporation’s long-term plans for the Kingston waterfront — an area that property developers have eyed for mixed-use regeneration — remain subject to the fiscal constraints of the IMF Stand-By Arrangement framework.

Investment Climate

Tourism’s recovery in July has provided an important signal for the resort property market. Montego Bay hotel occupancy rates improved in July compared to the equivalent month in 2009, and the short-term rental and villa market on the north coast is showing signs of renewed activity. Developers with resort-adjacent residential projects report increased enquiries from both domestic buyers and members of the Jamaican diaspora looking to acquire vacation properties that could generate rental income when not in personal use.

Diaspora and Remittances

Remittance flows into Jamaica are broadly stable, with the Bank of Jamaica reporting inflows consistent with the first half of 2010 trend. The diaspora community — with concentrations in New York, London, Toronto and Miami — continues to be a critical source of housing market demand, particularly in the J$5–15 million price range. Agents working with diaspora buyers note that the resolution of the Dudus crisis has begun to restore confidence, with some buyers who had paused in May and June resuming their property searches in July.

Affordability

Affordability remains the central challenge confronting Jamaica’s housing market. The exchange rate, hovering around J$87–88 per US dollar, imposes real costs on construction by inflating the price of imported materials. Inflation above 11% means that real wages are effectively declining for most Jamaican households, further stretching budget constraints. The NHT loan limit of approximately J$3.5–4 million, while helpful for lower-income buyers, falls short of the price of a typical new residential unit in most urban areas, requiring buyers to supplement with personal savings or commercial borrowing at unfavourable rates.

Regional Context

Haiti’s reconstruction continues to dominate Caribbean regional attention. The international community’s response to the January earthquake has highlighted both the scale of resources required for post-disaster housing rehabilitation and the institutional challenges of coordinating reconstruction in a fragile state context. For Jamaica, the regional conversation has reinforced the importance of building standards enforcement and disaster preparedness — areas where the government’s record has been mixed. CDEMA has engaged Jamaican officials in conversations about strengthening regional housing resilience frameworks.

Looking Ahead

The trajectory for the third quarter of 2010 points to a gradual improvement in market conditions, underpinned by the post-Dudus security normalisation and the slow-moving but directionally positive interest rate environment. The key variable to watch is commercial mortgage rate movement: if any of the major banks move to reduce retail mortgage rates in August or September in response to lower wholesale funding costs, the effect on market sentiment could be disproportionately positive. The NHT’s lending pipeline will continue to support the affordable segment regardless of commercial rate movements. The government’s handling of the Tivoli reconstruction question will be an important indicator of its capacity to manage the political and social dimensions of the post-crisis recovery. For most market participants, the watchword for August remains cautious optimism — with the emphasis firmly on the caution.