Inflation at 11%, Rates High: Jamaica’s Housing Aspiration Tested to Its Limits — November 2010

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

October in Brief

• Inflation remained above 11% in October, sustained by elevated food and energy costs, continuing to erode the real purchasing power of Jamaican households.
• Commercial mortgage rate reductions announced in September began to take effect; prime rates at leading banks now approaching the 11–12% range from a peak above 13%.
• Kingston residential market showed further improvement in transaction volumes though upper-end market (above J$20 million) remains subdued.
• NHT announced an increase in its maximum loan limit from J$3.5 million to J$4.5 million for qualifying contributors, effective January 2011.
• New hotel development plans announced for Trelawny parish, boosting confidence in north Jamaica resort property corridor.
• Portmore’s residential market remained the single most active suburban location, with multiple NHT-assisted schemes reporting strong buyer interest.

Housing Market Overview

Jamaica’s property market finds itself in an uncomfortable paradox as November arrives: the structural ingredients for a sustained recovery — monetary easing, improved security conditions, stable exchange rate and robust NHT lending — are all present, yet the persistence of 11%-plus inflation continues to undermine the real affordability improvements that would ordinarily accompany falling interest rates. For a Jamaican household seeking to service a commercial mortgage on a modest property, the arithmetic is still forbidding.

The market’s performance in October was, nonetheless, genuinely better than the same period a year earlier. Transaction volumes in Kingston’s residential market showed improvement, with the gains concentrated in the J$5–15 million price range — the segment most directly served by a combination of NHT financing and modest commercial top-up loans. The upper end of the market, where buyers require larger commercial mortgages, remains the most challenged: here, the absolute level of monthly payments for a J$25 million-plus property still represents a formidable barrier even at slightly reduced rates.

Sellers across most segments remain reluctant to significantly reduce asking prices, preferring to wait for the rate environment to improve rather than accept below-expectation offers. This dynamic — well-documented in housing markets experiencing slow recoveries — means that supply available at transaction-clearing prices is limited, which in turn constrains volume even when buyer demand is nominally present.

Government Policy and NHT Activity

The NHT’s announcement of a loan limit increase to J$4.5 million effective January 2011 was the most significant housing policy development of the October period. The adjustment, the first meaningful revision to the NHT’s lending ceiling in several years, reflects the Trust’s acknowledgment that construction cost inflation has progressively eroded the purchasing power of its existing limits. The new ceiling will allow contributors to finance a broader range of properties without resorting to commercial top-up financing, expanding both the effective market for NHT-eligible buyers and the inventory of properties that developers can realistically price for NHT-funded purchases.

The government has also been in discussions with the Inter-American Development Bank regarding funding for a community housing improvement programme in select inner-city communities, including parts of West Kingston. While a formal agreement has not yet been signed, the discussions signal an intention to address the housing rehabilitation needs of communities affected both by the economic downturn and by the specific damage caused during the May security operation. The HAJ has been designated as the implementing agency for any such programme.

Construction Sector

Construction activity in October showed continued improvement over the weak comparisons of late 2009 and early 2010. The recovery is most visible in the suburban residential segment, where NHT-backed schemes in St Catherine and St James are advancing. Contractors report stronger forward bookings for the first quarter of 2011 than at any point since the downturn, a sign that developers are becoming more confident in committing to new projects.

The commercial construction market in Kingston and New Kingston is also showing improvement, with several office and retail fit-out projects proceeding as tenants who had deferred decisions during the crisis period begin to commit. This commercial activity has indirect benefits for the residential market by generating employment income and by improving the overall vitality of urban areas that serve as the backdrop for residential demand.

Major Developments

The announcement of a new hotel development in Trelawny — in the corridor between Montego Bay and Ocho Rios that has been the focus of considerable tourism investment interest — is the most significant real estate-adjacent development of the October period. Hotel investment in Jamaica generates demand for construction labour, management and service employees, and associated residential accommodation, all of which have positive spillover effects on local property markets. The Trelawny corridor, which includes areas of outstanding natural and cultural heritage, has been identified by the Tourism Product Development Company as a priority area for resort development.

In the residential market, several major Kingston developers have announced plans to bring new inventory to market in early 2011. These projects, which have been held back by the combination of financing challenges and post-Dudus uncertainty, represent the first significant addition to Kingston’s upper-end residential supply pipeline in some time. Whether they will find buyers at anticipated price points will depend critically on the degree of commercial mortgage rate improvement achieved by the first quarter.

Infrastructure

Portmore’s growing population continues to strain the infrastructure serving Jamaica’s largest satellite community. Water supply, road capacity and public transport are all subjects of ongoing concern for Portmore residents and their representatives. The National Works Agency has been undertaking road maintenance in the Portmore corridor, but the pace of infrastructure investment has not kept up with the pace of residential development. This gap between housing supply and supporting infrastructure is a systemic challenge that affects the liveability and therefore the long-term value of properties throughout the greater metropolitan area.

Investment Climate

The investment climate in October is assessed as moderately improved compared to the first half of 2010. The Jamaica Stock Exchange’s performance through the third quarter has been positive, and several institutional investors have indicated an increased appetite for Jamaican real estate as an inflation hedge in a period of elevated consumer prices. Pension funds, in particular, have been reviewing their property allocations in the context of the JDX-driven restructuring of fixed-income returns, with some increasing their exposure to commercial and residential real estate as a substitute for government securities whose yields have fallen post-JDX.

Diaspora and Remittances

Third-quarter 2010 remittance data, expected to show further year-on-year improvement, will be an important input into the assessment of fourth-quarter housing market prospects. Anecdotally, agents report that diaspora buyers are more active in October than they have been at any point since the start of the Coke crisis in 2009–2010. The approaching holiday season typically brings a seasonal uplift in diaspora-funded property transactions, as Jamaicans abroad who visit over Christmas are an important source of property purchase decisions. The market is cautiously anticipating a solid seasonal performance.

Affordability

The NHT loan limit increase to J$4.5 million, while not yet in effect, is already improving buyer sentiment in the middle market. The knowledge that larger NHT loans will be available from January is bringing forward purchasing decisions among contributors who had been waiting for improved financing terms. At the commercial mortgage end, the rate reductions delivered in October represent meaningful but still insufficient relief: a J$10 million mortgage at 11% requires monthly payments of approximately J$115,000 — well beyond the capacity of median-income Jamaican households. The threshold for meaningful affordability improvement in the commercial segment remains a sustained rate below 10%.

Regional Context

Across the Caribbean, housing markets are in various stages of post-crisis recovery. Trinidad and Tobago, supported by energy revenues, has seen a more robust recovery than most regional peers. Barbados continues to face challenges in its high-end tourism-driven property market. The Dominican Republic, Jamaica’s most direct competitor for resort property investment, has maintained more active development pipelines, partly reflecting a less burdened fiscal position. For Jamaica, the regional context is a reminder that the island’s fiscal consolidation path, while necessary, imposes real costs on public investment capacity that affect the long-term housing development landscape.

Looking Ahead

November and December bring Jamaica’s traditional end-of-year market activity, when the combination of returning diaspora visitors, the approaching holiday season and year-end budget decisions by developers and buyers typically generate a seasonal uplift in transactions. Against the backdrop of improving but still challenging conditions, the market’s consensus expectation is for a solid fourth-quarter close that sets up 2011 as a year of recovery rather than merely stabilisation. The NHT loan limit increase, the direction of commercial rates and the trajectory of inflation will be the three variables that most determine whether that optimism is validated.