Mid-Year Stocktake: Jamaica’s Property Sector Eyes the Rate Threshold — October 2010

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

September in Brief

• Bank of Jamaica reduced the overnight policy rate in September, maintaining its easing trajectory as inflation pressures appeared to moderate slightly from the 11% peak.
• The Ministry of Finance published mid-year fiscal data showing Jamaica broadly on track with IMF Stand-By Arrangement targets, bolstering confidence in continued monetary easing.
• Kingston residential transaction volumes in September showed year-on-year improvement for the first time in 2010, though from a low base.
• At least two commercial banks formally announced reduced mortgage rates effective in the fourth quarter, the first concrete retail rate reductions in over a year.
• Construction sector employment data showed modest improvement, consistent with an uptick in new residential project starts outside Kingston.
• Portmore and Spanish Town continued to lead suburban residential activity, with NHT-assisted developments reporting strong take-up of available units.

Housing Market Overview

September delivered the first concrete evidence that Jamaica’s housing market is moving from stabilisation toward recovery. Transaction volumes — the most direct measure of market activity — showed a year-on-year improvement in Kingston for the first time in 2010, while the announcement by two major commercial banks of mortgage rate reductions effective in the fourth quarter generated tangible improvement in buyer sentiment. The market is not yet operating at anything close to the volumes of 2006–2007, but the directional shift is real and, market participants hope, durable.

The geography of the recovery, however, remains highly uneven. The Kingston 6 corridor — traditionally Jamaica’s most prestigious residential address — has seen some renewed interest from both local buyers and returning diaspora members, but the broader western and central Kingston market continues to underperform. Sellers and buyers are still finding it difficult to agree on prices that reflect the realities of a market that has been through an extended downturn, and the gap between asking prices and effective offer prices remains wider than in more normal market conditions.

The secondary markets in St Catherine, St James and Manchester continue to outperform Kingston in volume terms, a pattern that reflects both the demographic growth of suburban Jamaica and the relative accessibility of NHT-financed housing in these areas. Developers with suburban projects that can be priced within or close to NHT limits are reporting the strongest demand, while those targeting higher price points are more dependent on the commercial mortgage market and therefore more exposed to the current rate environment.

Government Policy and NHT Activity

The NHT’s board and management have been engaged in an ongoing review of loan limits, recognising that the gap between the Trust’s maximum loan of approximately J$3.5–4 million and the actual cost of a new residential unit — typically J$5–8 million for a basic two-bedroom home in most urban areas — has widened materially over the past several years of construction cost inflation. A loan limit increase is expected to be announced in the coming months, which would meaningfully expand the number of NHT contributors who can use Trust financing as their primary or only source of housing finance.

The HAJ has been progressing its social housing programme in partnership with several parish councils and community-based organisations, targeting households below the NHT income threshold who require subsidised housing solutions. While the scale of this programme is modest relative to the overall housing deficit, it represents an important safety net function and helps to prevent the displacement of very low-income households from urban areas as property values gradually recover.

Construction Sector

Construction sector activity has picked up in September compared to the same period in 2009, with new residential project starts showing improvement in suburban parishes. The pattern of recovery mirrors the housing demand geography: NHT-dependent suburban projects are moving forward while commercial-rate-dependent urban development remains constrained. Contractors report that the labour market for skilled construction workers has tightened modestly, an early indicator of improving sector activity.

Material costs remain a challenge. Cement and steel prices have stabilised compared to their peak levels but have not declined to the extent that developers had hoped when the commodity cycle turned. The J$87–90 exchange rate range imposes continuing pressure on import-dependent construction inputs, and any depreciation in the currency would immediately feed through to higher construction costs and compressed developer margins.

Major Developments

The formal announcement of commercial mortgage rate reductions by two major banks — the first such moves since before the Jamaica Debt Exchange — represents a significant milestone for the property market. The reductions, expected to bring prime mortgage rates down by 1–2 percentage points from their post-crisis peaks, will not by themselves resolve the affordability challenge, but they represent a directional shift that industry participants have been awaiting for most of the year. The psychological impact on buyer confidence, even before the rate changes take effect, has been noted by agents across the market.

In the commercial real estate space, New Kingston has seen a gradual improvement in office leasing activity as the broader business confidence recovery continues. The hotel development pipeline on the north coast, while not dramatically active, is showing some signs of new project enquiries as tourism recovery continues. These commercial real estate trends have indirect but important implications for the residential market: commercial activity generates employment and income, the prerequisites for housing demand.

Infrastructure

Road improvement and rehabilitation works in several parishes have been progressing, with the National Works Agency reporting activity in Clarendon, St Catherine and St Elizabeth in particular. These improvements in transport infrastructure are relevant to the housing market because they expand the effective commuting range and therefore the range of residential locations accessible to urban workers. Communities that were previously too remote for practical commuting become viable housing options when road quality improves, expanding the geographic market for residential development.

Investment Climate

Jamaica’s investment climate has benefited in September from a combination of the post-Dudus security normalisation, the on-track fiscal performance under the IMF programme and the improved direction of interest rates. The Jamaica Stock Exchange has shown modest gains through the September quarter, and the private sector organisations have reported a modest uptick in business confidence surveys. For property investors, the improving macro picture reduces — but does not eliminate — the risk premium they attach to Jamaican real estate relative to regional comparators.

Diaspora and Remittances

The second quarter of 2010 remittance data, published in September, showed a year-on-year increase compared to 2009 — the first such improvement since the global financial crisis began to affect diaspora earnings in 2008. The recovery in remittances provides important support for consumer spending and, through the property market, for the lower-end residential segment. Agents report that diaspora-funded transactions are showing increased activity in September, with some buyers who had been monitoring the market since early in the year now moving to close.

Affordability

The affordability picture remains challenging but is improving at the margins. The forthcoming commercial rate reductions will reduce monthly mortgage payments for new borrowers, expanding the effective pool of buyers who can qualify for commercial financing. Inflation, while still elevated, has shown some signs of peaking. And the NHT’s expected loan limit increase will allow more contributors to use Trust financing as their primary route to homeownership. These are incremental improvements rather than a structural resolution of the affordability challenge, but they are moving in the right direction.

Regional Context

Jamaica’s positioning within the Caribbean housing landscape has improved somewhat following the resolution of the Dudus crisis. Several regional economies — including Barbados, Trinidad and some Eastern Caribbean states — are showing more pronounced real estate market weakness than Jamaica, partly reflecting their greater dependence on financial sector activity and foreign direct investment flows that have been more severely affected by the global crisis. Jamaica’s NHT infrastructure and the structural demand underpinning the lower-income housing market provide a measure of cyclical resilience not available in all regional economies.

Looking Ahead

The fourth quarter of 2010 enters with the property market in a better position than at any point since the Dudus crisis began in May. The commercial rate reductions expected to take effect will be the single most important near-term catalyst for market activity. If those reductions stimulate a meaningful increase in transactions before year-end, 2010 will close as a year of stabilisation and modest recovery — a significant improvement on the trajectory implied by the first half of the year. The NHT loan limit decision, the ongoing fiscal consolidation and the trajectory of BOJ monetary policy will all shape the picture in the months ahead. For market participants who have been waiting for the tide to turn, October brings the clearest evidence yet that the turn has begun.

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