Bruised but Standing: Jamaica’s Housing Market in the Wake of the JDX and the Tivoli Crisis

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

• Eight months after the Jamaica Debt Exchange and four months after the Tivoli Gardens crisis, Jamaica’s housing market is stabilising but has not recovered
• The JDX’s fiscal savings are being channelled into the primary surplus required by the IMF Stand-By Arrangement; the first SBA reviews have been passed
• The Dudus extradition operation shook investor and tourist confidence in the summer; its economic effects are being felt in the tourism and broader service sectors
• Commercial mortgage rates remain elevated but have edged marginally lower as the JDX’s impact on the yield curve slowly transmits to lending conditions
• NHT disbursements continue apace; the Trust’s contribution-funded model has insulated it from the political and security shocks of 2010
• The construction sector shows no signs of meaningful recovery; affordable housing supply remains critically insufficient relative to household formation rates

October 2010 finds Jamaica’s housing market bruised but standing. The year has been one of extraordinary challenge. The Jamaica Debt Exchange of February compressed the income of financial institutions and triggered the fiscal adjustment that the IMF’s Stand-By Arrangement required. The Tivoli Gardens operation of May-June shook confidence, damaged Jamaica’s international image and cast a shadow over the tourism sector that is central to the economy’s foreign exchange earnings. Remittance flows — resilient through the 2008-2009 global recession — have remained steady, providing a critical household income floor. The NHT has continued its operations without interruption. But the formal housing market’s recovery — the expansion of new supply, the return of developer confidence, the emergence of a commercial mortgage market accessible to working Jamaicans — remains a future condition rather than a present reality.

What Jamaica’s housing market has demonstrated in 2010 is resilience: the capacity to continue functioning, at a subdued level, through shocks that would have more severely damaged a less robust institutional structure. The NHT, the commercial lenders, the development community and the informal housing sector have all absorbed the year’s blows and have not collapsed. That is not a trivial achievement in a year of this difficulty. It is also not the same as recovery.

The JDX in Context: Eight Months of Adjustment

The Jamaica Debt Exchange was presented as the mechanism through which Jamaica would bring its fiscal trajectory under control without triggering a disorderly default that would have been far worse for all parties. Eight months later, the assessment is that the mechanism has worked, within its own terms. Financial institutions accepted the exchange’s terms — lower coupons, extended maturities — and the acute refinancing risk that had threatened to produce a market crisis has receded. The IMF’s Stand-By Arrangement is in place. The first programme reviews have been passed. Jamaica’s borrowing costs in international markets, while still elevated, have not spiked to the crisis levels that the pre-JDX situation threatened.

For the mortgage market, the JDX’s effects are visible in a marginal easing of the yield curve: government bond yields have declined from their pre-JDX peaks, and this has slowly transmitted to commercial lending rates. The decline is real but modest. Commercial mortgage rates that were, prior to the JDX, at rates above twenty percent annually for some products, have edged toward the high teens. This is an improvement. It is not an affordability transformation. The typical working Jamaican family remains excluded from commercial mortgage financing at these rates.

The Tivoli Aftermath: Investor Confidence and the Tourism Link

Jamaica’s housing market has a direct dependence on tourism that is sometimes underestimated in affordability discussions focused on the Kingston Metropolitan Area. In the resort communities of St James, Trelawny, St Ann and Portland, residential property values and rental incomes are heavily influenced by tourism flows and the income that tourism generates for local communities. When tourism is strong, resort-area property is in demand from both buyers and renters; rental incomes rise and property values appreciate. When tourism is damaged by negative publicity — as happened in the summer of 2010 — these areas feel the consequence directly.

The Tivoli Gardens coverage was concentrated on Kingston and West Kingston specifically, but its effects on tourism were island-wide. Travelers who had been considering a Jamaica holiday and saw the images of armed operations in Jamaican communities exercised caution. The summer 2010 tourist season was weaker than 2009 in some corridors, and 2009 was already a recession year. The recovery of resort-area property markets depends, in part, on the recovery of Jamaica’s tourism brand — and that recovery is underway but will take time to fully restore the booking patterns that pre-crisis levels represent.

Diaspora Remittances: Holding the Line

Against the year’s difficulties, diaspora remittances have been a stabilising force. Jamaica receives approximately US$1.5 to US$2 billion annually from its diaspora — one of the largest remittance-to-GDP ratios in the world. These flows support household consumption, fund incremental construction, and provide the capital that keeps Jamaica’s informal housing sector active even when the formal market is depressed. Through the global recession and the 2010 domestic crises, remittance flows have held up better than many economists expected. The Jamaican diaspora’s commitment to the families it left behind has proven to be remarkably crisis-resistant.

What This Means

For NHT contributors, October 2010 is a market in which action is more rewarding than waiting. The NHT’s rates are subsidised and the Trust is disbursing. Properties in established communities are not inflating strongly; motivated sellers exist. The argument for proceeding with a financially sound NHT transaction is stronger in a quiet market than in a buoyant one.

For resort-area property, the tourism damage of 2010 has created value opportunities in communities like Montego Bay, Ocho Rios and Negril. Properties that would have commanded premium prices in a strong tourism year are available at more restrained valuations. For buyers with the long-term horizon and the cash or hard-currency financing to act, this vintage may prove to have been a favourable entry point.

The Outlook: A Long Road Through Steady Steps

Jamaica’s housing market will not recover quickly. The macro foundations laid by the JDX and the IMF programme require years of sustained primary surpluses and declining debt ratios before they produce the commercial rate environment that affordable homeownership requires. The Dudus year’s damage to investor and tourist confidence will take time to repair. The structural supply constraints — planning system costs, infrastructure deficits, titling backlogs — require sustained policy attention that difficult fiscal environments make hard to deliver. The long road is real. What October 2010 can offer is the confidence that Jamaica’s institutions are intact, that the IMF programme is holding, and that the direction, at least, is the right one.

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

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