Every structure, no matter how badly damaged, has a moment when it reaches the lowest point of its distress. The roof has leaked its worst. The water has done its damage and found its level. The walls are wet but standing. And the question that now confronts the owner is not whether this can get worse — it can always get worse — but whether the damage that has already occurred is the damage that was going to occur, or merely the beginning of a longer story of deterioration. Jamaica’s property market, in the summer of 2011, is at exactly that moment. The worst of the 2009-2010 shock appears to be behind it. The damage is real and significant. But there are tentative signs — fragile, cautious, easily overstated but unmistakably present — that the floor has been reached and the long climb back has begun.
Jamaica’s GDP grew by 1.4 percent in 2011, following a contraction of 1.4 percent in 2010 and a deeper contraction of 3.4 percent in 2009. The symmetry of those numbers — from -3.4 to -1.4 to +1.4 — gives the impression of a trajectory, of an economy climbing back from its trough along a predictable path. The reality is less orderly. The 1.4 percent growth of 2011 is real, but it is fragile and heavily dependent on a global economic environment that is itself fragile. The European sovereign debt crisis is deepening. The United States recovery is hesitant. The diaspora communities in North America and the United Kingdom — the communities whose earnings fund Jamaica’s remittance flows and, ultimately, a significant portion of its property activity — are still operating in an economy that has not fully healed from the 2008-2009 shock.
Against this background, the Jamaican property market’s attempt at recovery is taking place in conditions that are challenging enough to frustrate even the most patient optimist. But there are genuine positives to report, and this column will report them honestly alongside the negatives.
What 2010 Actually Looked Like: The Market’s Lowest Point
Any assessment of where Jamaica’s property market stands in mid-2011 must begin with an honest account of where it was in 2010, because 2010 was, by most measures, the weakest year for real estate activity that Jamaica had experienced in the modern era. The global financial crisis that had begun in 2008 had, by 2009-2010, fully transmitted its effects through the Jamaican economy: through falling remittances, through weakening tourism revenue, through credit contraction, and through the kind of generalised confidence collapse that does not respond quickly to policy intervention.
Real estate and construction sector growth in 2010 came in at approximately 3 percent in nominal terms — a figure that, after accounting for construction cost inflation, probably represents a slight real contraction in activity. This compared to growth rates of approximately 36.5 percent in 2006-07 and around 30 percent in 2008. The collapse in construction activity between 2008 and 2010 was one of the most severe sectoral contractions in Jamaica’s post-independence economic history, and its effects were felt across the entire property ecosystem: developers, contractors, suppliers, estate agents, mortgage lenders, valuers, and solicitors all saw their property-related activity fall sharply.
Mortgage rates in 2010 — building societies were charging approximately 12.5 percent and commercial banks around 8-9 percent for their mortgage products — meant that formal homeownership was financially inaccessible for a large proportion of Jamaica’s workforce. The NHT continued to provide subsidised financing for its qualifying contributors, but even the NHT’s rates had been rising in the high-rate environment of the late 2000s, and its loan ceiling remained constrained relative to actual property costs. The market for new residential properties that required commercial mortgage finance was, in 2010, effectively frozen.
Tourism revenue — one of the key external inputs into Jamaica’s resort property markets — had been recovering slowly. Total tourism expenditure in 2010 reached US$2.10 billion, up from US$2.07 billion in 2009 when it had fallen 6.84 percent from the 2008 peak of US$2.22 billion. The recovery was modest but directionally correct, and it signalled that the international demand for Jamaica as a destination was intact, if temporarily suppressed by the global economic environment. For the resort corridor property markets in Montego Bay, Negril, and Ocho Rios, this tourism recovery was the single most important positive development of 2010 — more meaningful, for those markets, than anything happening in the domestic financial sector.
The Remittance Recovery and What It Means for Housing
One of the most important positive developments in 2010-2011 is the recovery of remittance flows into Jamaica. Remittances had fallen by approximately 11.2 percent in 2009 — a decline of around US$225 million from their 2008 peak of US$2.02 billion — as the global financial crisis reduced the earning capacity and employment security of Jamaicans abroad. By 2011, remittances had recovered to approximately US$2.025 billion, substantially restoring the flows that had been disrupted by the crisis.
The recovery of remittances to near-peak levels in 2011 has multiple implications for the property market. The most immediate is the restoration of household income for the Jamaican families who depend on diaspora transfers for a meaningful portion of their consumption. Families that were cutting back in 2009-2010 — deferring maintenance on the family home, postponing construction projects, reducing savings — are, by 2011, beginning to restore their investment activity. The incremental builder — the Jamaican family that constructs a house one room at a time as funds allow, over a period of years, using remittance income to fund each stage — is back at work in a way they were not in 2009.
The more aspirational implication is the gradual restoration of diaspora investment appetite. The Jamaican in Toronto or Birmingham who had stopped thinking about buying property back home in 2009 — who had watched the exchange rate depreciate, the crime statistics worsen, and the economic situation deteriorate, and had concluded that this was not the moment — is beginning, by 2011, to reconsider. Not decisively, not en masse, but at the margin. The conversations are starting again. The enquiries to estate agents in Kingston and Montego Bay are picking up slightly. The investment that was deferred, not cancelled.
Mortgage Rates: Falling From a Very High Perch
Building society mortgage rates have moved from approximately 12.5 percent in 2010 to around 11.1 percent in 2011 — a reduction of 140 basis points in a single year that represents the fastest improvement in mortgage affordability since the pre-boom period. Commercial bank rates have followed a similar, if less uniform, trajectory. These rate reductions are the product of several forces working simultaneously: the Bank of Jamaica’s gradual easing of monetary policy as inflation has subsided; the Jamaica Debt Exchange of 2010, which reduced yields on government securities and created pressure on financial institutions to redeploy capital into lending at lower rates; and the competitive dynamics of a mortgage market in which both building societies and commercial banks are seeking to grow their loan books in an environment of limited alternative investment opportunities.
At 11.1 percent, building society mortgage rates are still expensive — far too expensive to make the mid-market accessible to most working Jamaicans. But the direction of travel is unambiguously positive, and the pace of improvement in 2010-2011 is faster than at any point in the previous decade. If this trajectory continues — and there are structural reasons to believe it will, as the debt exchange effects continue to work through the financial system — building society rates approaching 10 percent by 2012 are a realistic prospect. And at 10 percent, the qualifying buyer pool expands in ways that begin to have a meaningful impact on transaction volumes.
The NHT, meanwhile, is lending to its qualified contributors at rates that are substantially below commercial levels. The institution’s reach extends to every worker in the formal economy through the mandatory contribution system, and its administered rates — which vary from approximately 3 percent for the lowest income band to 6 percent for higher income contributors — represent a form of mortgage subsidy that the government has maintained through the crisis as one of the few unambiguous benefits that working Jamaicans can point to from their mandatory NHT contributions. The NHT’s loan ceiling, at J$4.5 million, is the binding constraint on its effectiveness in the current environment, and the pressure to raise it is building.
The Geography of Tentative Recovery
Jamaica’s property market in 2011 is not recovering uniformly, and the geographic patterns of where activity is returning are instructive for understanding where the market’s foundations are strongest.
The resort corridor — stretching along the north coast from Montego Bay through Ocho Rios and the northwest from Negril to Savanna-la-Mar — is showing the most visible signs of life, for the structural reasons already noted: the buyer base is international, the financing is typically offshore, and the tourism recovery is creating a more supportive environment for vacation and retirement property. Several villa and condominium projects in Montego Bay that had been paused during the crisis are being cautiously reactivated. The inquiry rate from international buyers — particularly from North America — has improved from the lows of 2009.
Kingston and St Andrew are more complex. The upper segment — large family homes in Barbican, Cherry Gardens, and the gated developments above New Kingston — has seen a small number of transactions at prices that, in some cases, suggest a bottom has been reached. These are isolated data points, not a trend, but they are being noted by surveyors and solicitors who have been through enough cycles to distinguish between genuine bottom-finding and the false dawns that sometimes precede a further leg down. The tentative consensus among the most experienced observers is that the upper Kingston market has, in many specific sub-locations, found its floor.
The middle market in Kingston and St Catherine is where the outlook remains most uncertain. These are the properties financed through the formal mortgage market — the segment most directly affected by the high cost of building society and commercial bank credit. With rates still above 11 percent, the qualifying calculations for mid-market properties remain challenging for most working Jamaicans, and the volume of transactions in this segment reflects that affordability constraint. St Catherine’s NHT-funded affordable housing schemes continue to generate activity, providing a floor of sorts beneath the broader market, but the mid-market — the J$6-12 million townhouse, the decent three-bedroom in a managed complex — remains substantially below its pre-crisis volume levels.
The Debt Question: Jamaica’s Structural Problem That Will Not Go Away
No assessment of Jamaica’s property market in 2011 would be complete without acknowledging the structural context that overshadows everything else: the public debt. Jamaica entered the global financial crisis with a debt-to-GDP ratio that was already among the highest in the Caribbean. The crisis, and the fiscal response to it, has pushed that ratio higher. By 2011, the debt is approaching 130 percent of GDP — a level that is placing severe constraints on the government’s ability to stimulate growth, invest in infrastructure, or create the conditions that would materially improve the property market’s operating environment.
The Jamaica Debt Exchange of 2010 reduced the immediate interest burden by extending maturities and lowering coupons on domestic government bonds. But it did not reduce the face value of the debt. Jamaica still owes what it owed — the exchange merely restructured the terms on which it owes it. The underlying fiscal dynamics that produced the debt — recurring primary deficits, high current expenditure, insufficient revenue — have not been fundamentally addressed. The government that inherited this situation faces the unenviable task of achieving sufficient primary surplus to stabilise the debt ratio while simultaneously avoiding the contractionary effects of fiscal tightening in an economy that is barely growing.
This structural constraint is the single most important factor limiting the property market’s recovery potential in 2011-2012. It constrains government investment in the infrastructure that makes new housing areas viable. It constrains the monetary policy space that would allow the Bank of Jamaica to cut rates faster. It constrains household income through the wage restraint that is necessary to contain the fiscal deficit. And it creates the uncertainty that keeps diaspora investors and international capital cautious about Jamaica when they might otherwise be investing.
Predictions for 2012: The Test of the Recovery’s Fragility
The forecast for 2012 is one of cautious optimism qualified by serious risk — which is, admittedly, a formulation that can be applied to most years in Jamaica’s property market history, but which is particularly apt in the current environment.
On the positive side: mortgage rates will continue to fall. The Jamaica Debt Exchange’s effects are still working through the financial system, and the competitive pressure on building societies and commercial banks to reduce their mortgage rates will intensify as their cost of funds continues to fall. A standard building society mortgage rate approaching 10 percent by the end of 2012 is this observer’s base case — not a certainty, but a reasonable expectation given the structural forces in play.
Tourism’s recovery will continue. The global tourism market is showing resilience in the face of economic headwinds, and Jamaica’s competitive positioning as a value-for-money destination with strong brand recognition and improving service quality is holding. The resort corridor property markets will benefit from this continued tourism recovery, and the international demand for vacation and retirement property on the north coast will continue its gradual normalisation from the crisis lows.
On the risk side: the global economic environment remains uncertain. A deepening of the European sovereign debt crisis — which in mid-2011 appears to be worsening rather than resolving — could trigger a second round of economic slowdown in the advanced economies, reducing diaspora earnings and remittances, weakening tourism demand, and potentially reversing some of the fiscal progress Jamaica has made. The Jamaican government’s fiscal situation, while somewhat stabilised by the Debt Exchange, remains fragile and continues to depend on access to international capital markets at rates that could change if global risk appetite shifts.
More fundamentally, the property market’s recovery in 2012 will be limited by the fact that the structural preconditions for a genuine broad-based recovery — sustained GDP growth, falling unemployment, significantly lower mortgage rates, an improved fiscal framework — will not all be in place simultaneously in 2012. One or two of them will improve. The others will remain constrained. The market that results will be better than 2010, probably better than 2011 in terms of volume, but not yet a recovery in any sense that would satisfy the developers and investors who have been waiting since 2008 for the market to come back.
The floor has been reached. The climb has begun. It will be a long climb, and the path will not be straight. But the building is standing. The water has found its level. And the work of repair, slow and unglamorous as it will be, can now properly begin. In Jamaica’s property market, in the summer of 2011, that is enough.
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