The JDX’s Slow Medicine: Jamaica’s Housing Market Eighteen Months After the Debt Exchange

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

• Eighteen months after the Jamaica Debt Exchange of February 2010, the housing market has yet to feel a meaningful improvement in commercial mortgage affordability
• Prime Minister Bruce Golding’s government continues fiscal adjustment; the Dudus extradition crisis of May 2010 has passed but left lasting political damage to the JLP
• Commercial mortgage rates remain elevated; interest rate transmission from the JDX to the lending market has been slower than anticipated
• NHT remains the dominant formal affordable housing finance institution; its contribution base has been resilient despite difficult economic conditions
• The construction sector operates at depressed levels as developer finance stays tight and consumer confidence remains subdued
• Election speculation is intensifying; the JLP’s constitutional mandate runs to 2012, but political pressures may bring an earlier poll

When the Jamaica Debt Exchange was announced in January 2010 and completed the following month, there was a hope that the reduction in government interest payments it delivered would flow relatively quickly into a more affordable credit environment for Jamaican borrowers, including those seeking mortgages. Eighteen months later, in July 2011, that hope has been only partially realised. The JDX worked on its own terms: the interest savings are real, the fiscal space it created has allowed the government to continue operating without a disorderly market event, and the programme conditions attached to the Fund support agreement have been broadly met. What has not yet arrived is the transmission of those gains into the daily reality of Jamaican mortgage markets.

Commercial mortgage rates from Jamaica’s major lending institutions remain in the double digits. A family with a combined monthly income of J$80,000 to J$100,000 cannot, at these rates, service a commercial mortgage on a property priced at the J$7 to J$10 million level that represents the lower boundary of decent formal housing in the Kingston Metropolitan Area. The NHT’s subsidised rates remain the only route to formal homeownership for working Jamaicans in this income range. That has been true for years. The JDX was supposed to begin the process of making it less true. Progress has been slower than the exchange’s architects hoped.

The Political Year: Dudus, Damaged Trust and a Government Under Pressure

The year that preceded this July review has been among the most turbulent in Jamaican political life since independence. The extradition of Christopher Coke, known as Dudus, from West Kingston in June 2010 — following a military and police operation in the Tivoli Gardens community that resulted in significant loss of life and considerable controversy — dominated public discourse through the second half of 2010 and into 2011. The crisis damaged the Golding government’s standing and raised questions about the relationship between politics and organised crime that have not been fully answered. In July 2011, the government is governing, but its authority is diminished.

For the housing market, political instability is a depressant. Buyers who are uncertain about the government’s future and the policy continuity it implies defer major financial decisions. Developers who need long-term confidence in the regulatory and fiscal environment to commit to multi-year projects hold back. The election that the JLP’s mandate requires by 2012 at the latest has been a source of market uncertainty for the better part of a year, and that uncertainty shows in the subdued transaction volumes that characterise the formal market in mid-2011.

NHT Contributions: The Resilient Floor

Against this difficult backdrop, the National Housing Trust has performed as its designers intended: as a stable institution insulated from the volatility of the political and commercial cycle. Its mandatory payroll contribution model — three percent from employees, five percent from employers, flowing directly to the Trust outside the government’s general budget — has continued to generate income through the difficult years since the global financial crisis. The Trust’s reserve position is solid. Its mortgage disbursements have continued, providing the floor beneath formal affordable housing finance that would otherwise simply not exist.

The NHT’s constraint is not financial; it is structural. The Trust lends against properties within its approved price ceilings. As Kingston’s property prices have risen over the years, partly through genuine appreciation and partly through construction cost inflation, the gap between what the NHT will finance and what an acceptable property actually costs has widened. NHT-eligible buyers with good contribution records increasingly find themselves able to borrow what the NHT will lend but unable to find properties that meet both the NHT’s criteria and their own minimum living standards. This structural mismatch is one of the defining problems of Jamaica’s affordable housing system, and it is a problem that has worsened over the post-JDX period.

The Rental Market: Still Under Pressure

Kingston’s rental market in July 2011 continues to absorb the demand overflow from a homeownership market that remains inaccessible to most working families. Occupancy rates in formal rental properties in well-located communities are high. Rents have risen in nominal terms, though real rental costs, adjusted for inflation, have been flatter. The affordable end of the rental market — the segment most relevant to the majority of Jamaican families who cannot qualify for or afford either NHT or commercial mortgages — remains critically undersupplied. The formal rental sector, in which properties are tenanted on documented agreements with maintenance obligations, is thin; the informal sector, in which rooms and yards are rented on handshake arrangements, is vast.

What This Means

For NHT-eligible buyers, the sustained operation of the Trust through the JDX period and beyond is the most important housing market fact of 2011. Buyers who have the contribution record, have identified qualifying properties, and can service the NHT’s mortgage should not wait for commercial rate improvements that have not yet arrived. The NHT’s rates are available now. The commercial improvement, when it comes, will be gradual — not sudden enough to justify continued deferral.

For investors in the rental market, July 2011’s strong occupancy rates and resilient rental demand in established locations provide a foundation for reasonable investment returns. Properties in Half Way Tree, New Kingston, Liguanea and well-connected Portmore communities are generating yields that compare favourably with deposit rates in the current interest rate environment.

The Outlook: Waiting for the Rate That Hasn’t Come

The JDX’s medicine is slow. Eighteen months after the exchange, the commercial mortgage rate improvement that its fiscal logic implies has not fully materialised. The structural reasons are clear: financial institutions’ balance sheets, adjusted to post-JDX yields, require time and improved economic conditions to translate lower funding costs into lower lending rates. The improvement will come — it is the inevitable consequence of a lower fiscal deficit and a declining sovereign risk premium. The question is when. For Jamaica’s housing market, the answer appears to be: not yet, but closer than it was. The market waits, as it has waited through the years of adjustment, for the rate environment that makes its aspirations achievable.

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

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