Rates Inch Lower, Confidence Inch Higher: Jamaica’s Housing Market Steadies — September 2010

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

August in Brief

• Bank of Jamaica monetary easing continued in August, with the overnight rate declining further; market participants anticipate the policy rate will reach 6.5–7.0% by year-end.
• At least one major commercial bank signalled plans to reduce its prime mortgage rate in the fourth quarter, the first concrete move toward retail rate relief.
• Kingston residential market reported improved buyer enquiries, particularly in the J$8–15 million range; actual transactions remain selective.
• NHT new loan approvals for the April–August period tracking above 2009 equivalents across most parishes.
• Jamaica’s tourism sector reported third consecutive month of improving arrivals, reinforcing demand for north coast resort property.
• Hurricane season concerns prompted renewed attention to building standards and insurance costs for homeowners and developers.

Housing Market Overview

The August housing market brought the first sustained evidence that Jamaica’s property sector is beginning to emerge from its prolonged period of stress. The combination of post-Dudus security normalisation, a directionally improving interest rate environment and a tourism recovery that is feeding through to north coast real estate has produced a mood among property professionals that is, for the first time in many months, cautiously constructive.

Residential property agents in Kingston report that the pipeline of prospective transactions — properties in the offer stage or under negotiation — has grown compared to June and July. The critical question, as ever, is conversion: turning enquiries and offers into completed transactions requires financing, and the financing environment, while improving, has not yet made the decisive shift that would unlock pent-up demand in the middle and upper-middle market segments.

The most active subsegment of the market remains the NHT-financed lower-end. In this segment, affordability is determined primarily by NHT loan limits and contributor eligibility rather than by commercial rates, and here the market has remained relatively robust throughout 2010. Outside the capital, suburban developments in St Catherine, St James and St Elizabeth are showing healthy take-up of NHT-assisted units, reflecting the structural demand that persists regardless of the macroeconomic cycle.

Government Policy and NHT Activity

The Golding government, despite ongoing political turbulence over the Dudus affair, has maintained a coherent housing policy framework through the NHT and HAJ. The NHT’s performance in the current fiscal year — with approvals ahead of the prior year in volume terms — reflects both institutional strength and the structural depth of demand. The Trust has also been exploring mechanisms to increase its effective loan limits in line with rising construction costs, a discussion that has been underway for several months and is expected to yield a policy announcement before the end of the calendar year.

The Housing Agency of Jamaica has continued to advance its land titling programme. In the rural parishes of Westmoreland, St Elizabeth and Trelawny, regularisation of informal land tenure has gathered pace, providing a growing number of Jamaican families with the formal property rights that are the prerequisite for accessing mortgage finance. Industry observers regard this programme as one of the government’s more successful housing interventions, even if its full impact on the formal property market will take years to materialise.

Construction Sector

The construction sector is showing early signs of recovery, though the base from which it is recovering remains weak. Cement sales data for the first half of 2010 indicated a year-on-year improvement, and industry contacts report that new project starts — though modest — are above the levels seen in late 2009. The improved outlook reflects several factors: lower financing costs for developers who accessed the bond market post-JDX, a stabilising cost-of-materials environment and the restoration of confidence in the Kingston market following the resolution of the Coke crisis.

Contractors and quantity surveyors note, however, that the recovery in construction activity is geographically uneven. Kingston’s inner city and western precincts remain largely inactive, while suburban and secondary-city markets in Montego Bay, Spanish Town and May Pen are more dynamic. This pattern mirrors the broader socioeconomic geography of the housing market: demand from NHT-eligible buyers in suburban locations is being met by a more active developer community than can be attracted to the more challenging inner-city terrain.

Major Developments

Hurricane Earl’s passage through the Caribbean in late August, while sparing Jamaica a direct hit, served as a reminder of the country’s persistent vulnerability to weather events. The passage of the storm prompted fresh attention to building standards compliance, storm damage insurance penetration and the structural quality of housing stock across the island. The Office of Disaster Preparedness and Emergency Management (ODPEM) issued updated guidance, and the Insurance Association of Jamaica renewed calls for improved property insurance uptake, particularly among homeowners in coastal and flood-prone areas.

In the commercial property space, New Kingston’s office and retail markets showed modest improvement in August, with several lease renewals and some new tenant activity reported. The commercial market, which serves as a barometer of broader business confidence, is recovering more quickly than the residential market, in part because commercial tenants are less dependent on long-term mortgage financing and more sensitive to short-term cash flow and trading conditions.

Infrastructure

The government’s capital spending programme for the current fiscal year has been subject to the constraints of the IMF Stand-By Arrangement, which targets a significant reduction in the fiscal deficit. Housing-adjacent infrastructure — water supply, drainage and roads — has been affected by these constraints, though the NHT and the World Bank-funded community development programmes have helped to partially fill the gap. The Water Resources Authority has been working with developers on water supply solutions for new residential schemes in areas where the National Water Commission’s network has not kept pace with development.

Investment Climate

Foreign exchange stability — with the Jamaica dollar trading at approximately J$87–90 per US dollar through August — has provided a supportive backdrop for property investment decisions. The absence of the sharp currency depreciation that afflicted Jamaica in 2008 and 2009 has allowed real estate pricing to remain relatively stable in US dollar terms, a factor that matters considerably to diaspora buyers who typically benchmark their property purchases against their foreign currency earnings.

Diaspora and Remittances

Remittance flows are showing a year-on-year improvement in mid-2010, reflecting the stabilisation of the Jamaican diaspora’s economic position in the United States and United Kingdom following the global financial crisis. The recovery in diaspora remittances is feeding through to consumer spending and, at the margin, to property purchasing activity. Agents who specialise in diaspora transactions report that August brought renewed momentum, with several transactions that had been in negotiation since early in the year moving toward completion.

Affordability

Affordability conditions remain challenging but are showing the first glimmers of improvement. Inflation, while still running above 11%, has not accelerated further; the Bank of Jamaica’s monetary easing has begun to reduce short-term borrowing costs across the economy; and commercial banks are beginning to signal, if not yet deliver, lower retail mortgage rates. For NHT contributors, the affordability picture has always been more favourable than for commercial borrowers, and this segment of the market remains the most active. The critical threshold, in the view of industry analysts, is a commercial mortgage rate below 10% — a level that would open the market to a significantly expanded pool of buyers. That threshold, however, remains some distance away.

Regional Context

The Caribbean housing market landscape continues to be shaped by the convergence of the post-financial-crisis recovery, the Haiti reconstruction challenge and the persistent threat of natural disaster. CARICOM heads of government, meeting in Montego Bay in July, discussed the regional development agenda with housing and infrastructure featuring prominently. For Jamaica, the regional conversation provides context for its own housing challenges while offering some grounds for comparative optimism: unlike several Eastern Caribbean economies, Jamaica has not experienced the severe fiscal crisis that has limited public housing investment elsewhere in the region.

Looking Ahead

September brings the mid-point of the Jamaican fiscal year and the first opportunity for a meaningful assessment of budget performance against targets agreed with the IMF. If the fiscal data demonstrate that Jamaica is on track to meet its targets, the government will have a stronger foundation from which to press for continued monetary easing. In the property market, the key developments to watch through the fourth quarter are the pace of commercial mortgage rate reductions, the NHT’s decision on loan limit adjustment and the trajectory of construction activity in the greater Kingston area. The directional signals are positive; the challenge remains converting those signals into the transaction volumes and housing supply increases that Jamaica’s growing population and urban workforce require.