US Downgrade Rocks Global Markets: Jamaica’s Housing Sector Rides Out the Storm – September 2011

Publication Date: September 3, 2011 | Coverage Period: August 3-September 2, 2011 | Category: Monthly Review

Month in Brief

• Standard and Poor’s stripped the United States of its AAA sovereign credit rating on August 5, downgrading to AA+, triggering the sharpest single-day fall in global equity markets since 2008.
• The Jamaica Stock Exchange shed roughly 3 percent across the week of August 8-12 as regional contagion from Wall Street and London sell-offs rippled through Caribbean bourses.
• The Bank of Jamaica held its policy rate steady, opting for caution amid global uncertainty; commercial lending rates remain in the 11-14 percent band.
• European sovereign debt fears intensified, with Italy and Spain drawing emergency European Central Bank bond purchases to prevent yields from spiralling beyond sustainability.
• Remittance inflows from the Jamaican diaspora in the United States showed early signs of softening, as US labour market data revealed a zero net-job-creation month for August.
• NHT mortgage applications ticked upward modestly, suggesting first-time buyers remain active even as international headwinds mount.

Housing Market

Jamaica’s residential property market entered September with a studied calm that belied the tumult on international exchanges. Valuers and estate agents contacted for this review reported that transaction volumes in the August coverage period were broadly in line with July, a modest but meaningful sign of resilience. The segment showing the greatest activity was the lower-middle tier — properties priced between J$6 million and J$14 million — where NHT-backed financing continues to underwrite demand that commercial lenders are reluctant to service at competitive rates.

In Kingston and St Andrew, the premium residential corridor stretching from Norbrook through Cherry Gardens to Barbican displayed little outward sign of distress. Asking prices on four-bedroom properties in those communities held steady, with vendors unwilling to discount in a market where dollar-denominated alternative investments suddenly look less certain following Washington’s credit embarrassment. A Kingston-based valuations firm observed that local sellers with US dollar exposure in their portfolios were actually more inclined to convert into real estate as a hedge, a dynamic that provided a thin but real floor beneath upper-segment asking prices.

The north coast, particularly the Montego Bay and Ocho Rios corridors, presents a more complicated picture. Tourism-adjacent properties — guesthouses, villas, and short-let apartments — were seeing renewed caution from prospective buyers worried that a weakening US consumer, now facing a stock portfolio shock on top of an already fragile jobs market, might curtail the winter holiday season. Agents in that belt have begun quietly trimming expectations, though listed prices remain publicly unchanged pending clarity on US demand through September and October.

Government Policy

The government maintained its post-Jamaica Debt Exchange fiscal posture through August, with no new housing-specific policy announcements emerging from Jamaica House or the Ministry of Finance. The political calendar — with general elections constitutionally due before November 2012 — is beginning to cast a long shadow over fiscal decision-making, though ministers have been careful to avoid commitments that might complicate an already-stretched budget envelope.

The NHT continued to operate as the primary institutional ballast in the mortgage market. With its concessionary rates sitting between zero and five percent depending on applicant income tier, the Trust remains the only route to genuine affordability for Jamaicans earning below the J$500,000 annual threshold. Officials confirmed that the NHT’s housing starts programme for fiscal year 2011-12 remains on track, though construction cost pressures — partly a function of imported materials priced in a volatile US dollar — are bearing on project economics.

There is mounting pressure from the private sector lobby for government to act on stamp duty and transfer tax reform. The combined burden of six percent stamp duty and registration fees remains a transaction friction that, critics argue, suppresses formal market activity and pushes buyers and sellers into informal arrangements that deny the government revenue and deny buyers legal title security.

Construction Sector

Construction activity in August was characterised by a split between NHT-sponsored schemes, which pressed ahead on schedule, and privately financed developments, where funding draw-downs from commercial banks slowed as lending committees took stock of the changed global risk environment. Portland, St Elizabeth, and sections of St Catherine saw ongoing NHT-linked site works, while two private condominium projects in New Kingston reported that their financing consultations with local banks had been temporarily deferred pending internal risk reassessment.

Materials costs remained elevated. Steel reinforcing bar, almost entirely imported, tracked global commodity prices which, while falling in the immediate aftermath of the S&P announcement, remain significantly above their 2009 lows. Cement prices were stable, reflecting domestic production capacity, but contractors noted that fuel costs — diesel for machinery and transport — continued to inflate project budgets relative to initial estimates drawn up in early 2011.

Investment Climate

The S&P downgrade and the concurrent European debt crisis have created a paradoxical environment for Jamaican property investors. On one hand, global risk aversion typically prompts capital to flee emerging and frontier markets for safe havens. On the other hand, with US Treasuries themselves now questioned and European sovereign paper in varying degrees of distress, the definition of a safe haven has been complicated. Some locally based fund managers noted that a measured allocation to Jamaican real estate — a hard asset generating rental yields in a market with structural undersupply — looks relatively attractive when the alternative is navigating a volatile bond landscape.

Foreign direct investment into the Jamaican property sector remains constrained by the macroeconomic challenges that predate August’s crisis: the fiscal consolidation path required under IMF-adjacent discipline, the high public-debt-to-GDP ratio, and the cost of doing business. But the events of August have not materially worsened the investment thesis for Jamaica relative to peers; if anything, the universality of the shock has levelled the comparative landscape somewhat.

Diaspora Dimension

Remittances are the single most important external financial flow into Jamaica, and the August shock struck at precisely the community most responsible for those flows: Jamaicans in the northeastern United States, concentrated in New York, Connecticut, and New Jersey, where financial sector employment is disproportionately high. Early anecdotal evidence suggests that August remittance volumes may have dipped slightly from July, though the data will not be confirmed by the Bank of Jamaica for several weeks.

Of greater longer-term concern for the property market is the behaviour of diaspora real estate investment — the purchasing of Jamaican residential property by overseas-based Jamaicans for retirement, family use, or rental income. This segment is typically US dollar-funded and is sensitive to US consumer confidence. With US markets down sharply and the political drama of the debt ceiling debate having shaken confidence in Washington’s fiscal management, some prospective diaspora buyers may defer planned purchases. Agents in resort-adjacent markets reported a modest uptick in enquiries from Jamaicans abroad seeking to understand whether prices had softened — a classic buyer’s-market probe.

Affordability

Jamaica’s structural housing deficit, estimated at over 100,000 units, ensures that affordability will remain a defining challenge irrespective of what unfolds on global markets. The domestic affordability calculus is driven primarily by three variables: household income growth, mortgage interest rates, and the cost of residential construction. None of these moved materially in August in a direction favourable to buyers.

Commercial bank mortgage rates, sitting in the 11-14 percent range, remain prohibitive for the majority of Jamaican households. A J$10 million mortgage at 12 percent over 25 years carries monthly repayments of approximately J$105,000 — exceeding the gross monthly income of the majority of formal-sector employees. The NHT’s concessionary lending fills part of this gap, but its capital is finite and its eligibility criteria exclude a substantial portion of the workforce employed in the informal economy.

The post-JDX interest rate environment has brought gradual easing, and the Bank of Jamaica’s hold decision in August signals that the policy rate path remains cautiously downward, but the transmission mechanism between the policy rate and commercial mortgage rates is slow and incomplete. Until commercial banks see sustained reductions in their own cost of funds — a process that may take several more quarters — the affordability gap will persist.

Looking Ahead

The immediate horizon for Jamaica’s housing market is shaped by two dominant uncertainties: the trajectory of the US economic recovery, and the resolution — or escalation — of Europe’s sovereign debt crisis. Greece’s position remains deeply precarious, with international creditors conducting a fifth review of programme compliance as this edition goes to press. A disorderly Greek default, which markets are pricing as a material risk, would generate a second global shock wave within weeks of the first.

For Jamaica, the domestic priorities are clear: sustaining the NHT construction pipeline, maintaining the fiscal consolidation path that has gradually rebuilt international confidence, and pressing ahead with the administrative reforms — including land titling and transaction cost reduction — that would unlock latent market activity. The global crisis is a reminder that Jamaica cannot insulate itself from external shocks, but it is also a reminder that the island’s structural property fundamentals — a growing population, a chronic supply deficit, and a productive diaspora — do not disappear when Wall Street panics.

The next edition of this review will assess conditions as of October 2011, by which point the European situation and the US jobs picture should have clarified sufficiently to form a firmer view of fourth-quarter prospects for Jamaican residential property.