After Dudus, After the JDX: Jamaica’s Housing Market Takes Stock of an Exhausting Year

Jamaica Homes Housing Affordability & Cost of Living Review — January 2011

• The year 2010 brought two defining shocks to Jamaica’s political and economic landscape: the Jamaica Debt Exchange in February and the Dudus extradition crisis in May
• The JDX reduced the government’s domestic interest burden and created fiscal space for the IMF programme’s primary surplus requirements
• The Tivoli Gardens security operation and Christopher Coke extradition in June damaged tourism sentiment and consumer confidence through the second half of 2010
• NHT ended 2010 with its institutional integrity intact and its mortgage function uninterrupted; the Trust enters 2011 as the market’s most reliable anchor
• Commercial mortgage rates declined marginally but remain far above affordable levels for most Jamaican households
• The informal housing sector continues to provide the primary shelter solution for families excluded from the formal market

Jamaica’s housing market enters 2011 grateful that 2010 is behind it. The year that has just closed packed into twelve months a domestic debt restructuring of historic proportions, a security crisis that put West Kingston under state of emergency and made international headlines, and the continued management of a global economic slowdown whose effects on tourism, remittances and trade flows had not yet fully lifted. It was an exhausting year for Jamaica and for every market — including the housing market — that depends on the confidence, income and credit conditions that political and economic stability normally provides.

The Jamaica Debt Exchange, completed in February 2010, was the dominant economic event of the year. It restructured approximately J$700 billion in domestic government bonds, reducing the coupons that institutional bondholders receive and extending maturities. The exchange was designed to reduce the government’s annual interest bill by enough to make the fiscal primary surplus the IMF required achievable without compressing expenditures to a level that would produce social or political rupture. In that objective, it succeeded. The reviews under the Stand-By Arrangement with the Fund that followed have been broadly passed. Jamaica, against some odds, has held its programme commitments through a very difficult twelve months.

The Dudus Shadow Over the Housing Market

The security operation in Tivoli Gardens that accompanied Christopher Coke’s extradition to the United States in late May and June 2010 was not, in the narrow sense, a housing market event. But its consequences reverberated through the market in ways that are visible in retrospect. The international media coverage of the operation — which depicted a Jamaican government using military force in a garrison community with casualties that reached into the dozens — damaged Jamaica’s image with tourists and investors at a moment when the tourism sector was already under pressure from the global recession. Hotel bookings in the summer of 2010 were affected. Investor sentiment toward the island, which had been fragile, became more cautious. Consumer confidence, which was already subdued by the fiscal tightening of the JDX, declined further through the second half of 2010.

The housing market’s response to this confidence shock was predictable: reduced transaction volumes, deferred purchase decisions, a retreat to the most liquid segments of the market. The upper end, where cash buyers are predominant, was less affected; the NHT segment, where the decision to purchase is more dependent on contribution eligibility than on market sentiment, was also more resilient. The commercial mortgage segment — already the most distressed part of the market — saw the largest relative deterioration, as buyer caution combined with lender caution to suppress activity further below an already low baseline.

What the JDX Delivered for Housing — and What It Did Not

The JDX’s housing market dividend remains, eleven months after completion, modest and indirect. The exchange reduced the government’s interest costs. This reduction creates the fiscal space for a primary surplus. The primary surplus reduces the debt ratio over time. A declining debt ratio reduces the sovereign risk premium. A lower sovereign risk premium, transmitted through the financial system, eventually reduces commercial lending rates including mortgages. This chain of causation is real but long, and the links have not yet all connected. Commercial mortgage rates have declined from their pre-JDX peaks, but they remain at levels that make formal homeownership inaccessible for the majority of Jamaican families.

The NHT’s rates, by contrast, have remained at their administered levels throughout the JDX period. For qualifying contributors, the NHT continues to offer mortgages at rates that are a fraction of commercial equivalents. This rate differential — between what the NHT offers and what the commercial market demands — is the single most important affordability feature of Jamaica’s housing finance landscape, and it remains as significant in January 2011 as it has been for the last decade.

The Informal Housing Economy in 2011

For every Jamaican family that bought a home through the NHT in 2010, there were several others who built their shelter informally: adding rooms to family properties, constructing on captured land at the urban periphery, converting commercial buildings to residential use in inner-city communities, building on family land whose ownership was understood within the community but never registered with the National Land Agency. This informal economy of shelter provision is Jamaica’s largest housing institution by volume, delivering more dwelling units annually than the NHT, commercial developers and the government combined. It does so without subsidies, without formal credit, and without appearing in any official housing statistics.

What This Means

For buyers entering 2011, the housing market’s message is the same as it has been for several years: formal sector employment with NHT contributions is the most reliable path to affordable homeownership, and the market that is available through that path is functioning. The commercial segment remains difficult. Patience, continued saving and contribution maintenance are the right strategies for buyers who are not yet in a position to transact.

For the government and policy community, the JDX and the IMF programme have addressed the macro crisis but have not yet delivered the housing market transformation that fiscal stabilisation is supposed to enable. The remaining work — reducing commercial rates further, improving planning systems, addressing the titling backlog, supporting affordable supply — requires sustained institutional attention through 2011 and beyond, in an election environment that will test the government’s capacity for long-horizon thinking.

The Outlook: 2011’s Promise and Its Conditions

Jamaica’s housing market enters 2011 with the foundation of the JDX in place and the IMF programme’s first year behind it. The conditions for improvement exist. The improvement’s pace depends on whether the programme holds, whether political stability returns, whether commercial confidence recovers from the Dudus shock, and whether the rate transmission chain finally delivers lower mortgage costs to the buyers who need them. These are real uncertainties, but they sit within a macro framework that is more stable than it was two years ago. For a housing market that has endured much, that is a meaningful, if modest, form of progress.

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

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