Full-year 2010 GDP contracts 1.4 per cent — a second consecutive year of negative growth but the smallest decline since 2007 — as interest rates continue to fall, the IMF programme holds, and the government begins preparing a National Debt Exchange that will extend the JDX’s interest rate benefits to a second tranche of the domestic debt stock.
Highlights
- Full-year 2010 GDP contracts 1.4 per cent — second consecutive year of negative growth
- Unemployment peaks at 12.4 per cent before beginning its long, slow decline
- BOJ repo rate falls to 6.75 per cent, the lowest since the 2008 crisis began
- Government begins consultations on a second domestic debt restructuring, the National Debt Exchange
- Property transaction volumes end the year approximately 40 per cent below their 2006 peak
- Construction employment begins modest recovery as NHT schemes and private developers resume work
The fourth quarter of 2010 offered Jamaica’s property market its clearest view in three years of what the future might hold. Not because conditions had returned to the buoyancy of the mid-decade boom — they had not, and would not for years — but because the range of outcomes had narrowed. The catastrophic scenarios that had seemed plausible in late 2008 and early 2009 — currency collapse, debt default, IMF programme breakdown — had not materialised. The JDX had held. The IMF programme had held. The exchange rate had held. And from the position of relative stability that these outcomes had created, the property market had established a cautious but genuine recovery trend across the second and third quarters of the year.
The BOJ’s benchmark repo rate, which had been above ten per cent through most of the crisis, ended 2010 near 6.75 per cent — its lowest level since 2008 and lower than at any point since the period before the oil price shock that began the market’s deterioration. Commercial bank mortgage rates were following, though with the lag characteristic of institutions still managing balance sheets with legacy government bond portfolios acquired at higher yields. For new mortgage applicants with strong credit profiles, rates in the eleven to twelve per cent range were available at the major commercial banks. NHT rates, which carried the trust’s structural subsidy, were available from six to eight per cent. The weighted combination, for a buyer accessing both NHT and commercial bank financing, was approaching levels where the monthly payment on a J$15 million to J$20 million property became serviceable on a professional household income.
The government’s preparations for a National Debt Exchange — a second voluntary restructuring that would extend the JDX’s interest rate compression to the portion of the domestic debt stock that had not been covered in January 2010 — was proceeding through consultations with financial institutions, pension funds, and other creditors. The NDX, when it came, would produce further reductions in the government’s annual interest bill and further compression of commercial lending rates. Its prospect was already being priced into financial market expectations: yields on longer-dated government bonds were trading below their contractual coupon rates, reflecting the anticipation that another restructuring would lower those coupons in due course.
Full-year property transaction statistics confirmed the recovery’s modest but real character. Title transfer volumes recorded at the National Land Agency ended 2010 approximately forty per cent below the 2006 peak but ten to fifteen per cent above the 2009 trough. The recovery was concentrated in three segments: NHT-eligible residential properties in the J$8 million to J$15 million range; lower-end commercial properties such as small retail units and warehouses that had been vacant during the recession and were now finding tenants and buyers again; and the distress segment, where developers or individuals with debt-financed properties from the boom years were selling at whatever price could be achieved to avoid foreclosure proceedings. This last category — involuntary sales at significant discounts to peak prices — was providing comparable transaction data that was helpful to valuers and was setting a new floor for market expectations that sellers who had held on were being slowly forced to acknowledge.
The BPO sector’s expansion in the Kingston metropolitan area was one of the quarter’s most significant structural developments from a property perspective. Business process outsourcing and information technology operations, attracted by Jamaica’s English-language skills and competitive labour costs, were taking up significant quantities of commercial floor space in New Kingston, Half-Way Tree, and along the Portmore corridor. This demand was absorbing the office vacancy that had accumulated during the financial crisis and was beginning to create pressure on Grade A commercial space that, within a few years, would generate interest in new office construction — providing what the property market’s commercial segment most needed: a demand signal that was structural rather than cyclical.
What This Means
The fourth quarter of 2010 closes a year of stabilisation and positions 2011 as the year in which the recovery may finally broaden from the modest base established in the second half of 2010. The National Debt Exchange, expected in early 2011, will be the next macro catalyst — compressing interest rates further, reducing the government’s debt service burden, and expanding the commercial bank mortgage market’s affordability. If the NDX matches the JDX’s success, the property market’s recovery should accelerate meaningfully through 2011, with transaction volumes returning toward pre-crisis norms and developers beginning to move new projects from planning into construction. The risks remain: the IMF programme must continue to hold, the exchange rate must avoid a new depreciation cycle, and global economic conditions must support the remittance and tourism flows on which Jamaica’s income base depends. But the distribution of outcomes, as 2011 approaches, looks substantially more favourable than at any point since Lehman Brothers failed in September 2008.
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