PNP’s First Budget: Portia’s Housing Priorities Take Shape — May 2012

Publication Date: May 3, 2012 | Coverage Period: April 3–May 2, 2012 | Category: Monthly Review

Month in Brief

• Finance Minister Dr. Peter Phillips tables the People’s National Party’s first full national budget on April 26, projecting expenditure of $566 billion and reaffirming fiscal consolidation as the government’s overriding discipline.
• The National Housing Trust announces revised targets for the 2012-13 financial year, committing to facilitate no fewer than 3,500 new beneficiary mortgages and accelerate completion of stalled schemes across Kingston, St. Catherine and St. James.
• The Bank of Jamaica holds its benchmark rate steady at approximately 6.25 per cent, signalling continued caution as inflation edges upward and the Jamaican dollar faces modest depreciation pressure against the US dollar.
• Commercial mortgage rates at the principal chartered banks and building societies remain in the 11-14 per cent band, sustaining the affordability squeeze that has defined the market since 2010.
• The government formally reviews the Housing Agency of Jamaica’s pipeline, identifying roughly 1,200 units in various stages of construction that had been delayed or abandoned under the previous administration, with instructions to prioritise their completion before the end of the fiscal year.
• Remittance inflows for the first quarter of 2012 are estimated at approximately US$480 million, a modest year-on-year improvement that sustains household income in diaspora-linked communities across rural and peri-urban parishes.

Housing Market

The residential property market in Jamaica entered the second quarter of 2012 in a state of cautious equilibrium. Transaction volumes in the formal sector remained subdued relative to pre-2008 norms, with solicitors and real estate agents reporting that deals were taking longer to close as buyers struggled to assemble the financing packages required to bridge the gap between asking prices and NHT mortgage limits.

In the Kingston Metropolitan Area, prices for established three-bedroom homes in sought-after communities such as Norbrook, Cherry Gardens and Stony Hill held broadly steady in the $18 million to $35 million range, reflecting the resilience of demand among the professional class even as the wider economy stagnated. In contrast, properties in inner-city adjacent neighbourhoods and in the secondary towns — Montego Bay, May Pen, Mandeville — showed a wider spread between listing price and achievable sale price, with vendors in some cases accepting discounts of 8 to 12 per cent to move transactions forward.

The rental market, meanwhile, continued to absorb frustrated would-be buyers. Landlords in New Kingston and the Half-Way Tree corridor reported virtually full occupancy, with monthly rents for a furnished two-bedroom apartment typically ranging from $60,000 to $90,000. This sustained rental demand is a direct function of the ownership gap: Jamaica’s housing deficit, estimated by various government and multilateral sources at well over 100,000 units, continues to grow as population formation outpaces supply.

Government Policy

The budget presented by Dr. Peter Phillips to Parliament on April 26 was, in the words of one senior ministry official, a document of constraint rather than ambition — and deliberately so. The PNP, returned to power in the December 2011 general election after nearly two decades on the opposition benches, inherited a fiscal position that left little room for large-scale capital spending. The central government’s debt-to-GDP ratio remained uncomfortably elevated, and negotiations with the International Monetary Fund over a successor programme to the 2010 Stand-By Arrangement were understood to be ongoing.

Against this backdrop, housing did not receive the dramatic injection of public capital that some in the construction industry had hoped for following the election. However, the budget did contain significant signals. The NHT’s contribution to the budget was maintained, and the Trust’s board was publicly tasked with improving disbursement rates — a recognition that the bottleneck in affordable housing delivery was as much administrative as it was financial. The government also indicated it would review the mortgage interest relief available to middle-income earners under the income tax code, with a view to widening access.

Prime Minister Portia Simpson Miller had campaigned explicitly on expanding home ownership as a vehicle for poverty reduction. In speeches during April, she reiterated this commitment, pointing to the NHT as the cornerstone institution through which the state would fulfil its obligations to Jamaican working families. Critics from the private sector, however, cautioned that without structural reform of the planning and titling systems — both of which remain sources of costly delay — any increase in NHT lending capacity would simply pile up behind the same bureaucratic bottlenecks.

Construction Sector

Construction activity in the residential sub-sector remained notably below its pre-global financial crisis peak. Data from the Statistical Institute and the Ministry of Water, Land, Environment and Climate Change indicated that building permit approvals for the first quarter of 2012 were marginally lower than the equivalent period in 2011, continuing a trend that has seen formal sector residential starts contract steadily since 2008.

The informal or self-build sector, which has historically accounted for the majority of new housing stock in Jamaica, showed greater resilience. Suppliers of cement, sand and aggregate reported steady if unspectacular demand from small-scale builders and individual householders extending existing dwellings. Hardware retailers in Half-Way Tree, Constant Spring and Portmore noted that remittance-funded building activity remained a reliable driver of material sales.

Among the larger developers, sentiment was cautiously watchful. Companies with shovel-ready schemes were hesitant to break ground until they had greater clarity on the fiscal environment and on NHT’s appetite to bulk-purchase completed units — a financing model that had been discussed as a means of de-risking private investment in affordable housing. The government’s review of the Housing Agency’s stalled projects was welcomed by the industry, though contractors noted that rehabilitation of incomplete structures often presented engineering complications that made such projects more expensive per unit than fresh starts.

Investment Climate

The broader macroeconomic backdrop remained challenging for property investment. GDP growth was tracking near zero for the 2011-12 financial year, a reflection of weak domestic demand, sluggish performance in tourism relative to expectations, and the continuing drag of high energy costs. The European sovereign debt crisis, which had escalated dramatically through late 2011 and continued to dominate global financial commentary into 2012, was a source of particular concern for Jamaica given the island’s dependence on external borrowing and on tourism receipts from European visitors.

For property investors, the arithmetic was difficult. A commercial mortgage at 12-13 per cent per annum represented a high hurdle rate when rental yields in most residential sub-markets were delivering gross returns of 6-9 per cent. This negative carry dynamic was limiting new investment activity to those buyers with substantial equity or access to NHT funds, which carry rates of zero to five per cent depending on beneficiary income.

The near-term pipeline of foreign direct investment into the property sector was thin. The much-discussed Caymanas Economic Zone project and various tourism-adjacent residential developments on the north coast remained at planning or pre-financing stages, their advancement contingent on resolution of Jamaica’s wider fiscal negotiations and an improvement in the global risk appetite for frontier market real estate.

Diaspora Dimension

Diaspora interest in Jamaican real estate was, as ever, a material undercurrent in the market. Jamaicans resident in the United Kingdom, the United States and Canada represent a significant source of demand for both residential purchases and land acquisition, particularly in the parishes of St. Elizabeth, Manchester and Portland where ancestral connections remain strong.

Estate agents operating in Kingston and on the north coast noted a continuing flow of enquiries from the diaspora, though conversion rates from enquiry to completed purchase remained modest. The obstacles were well-rehearsed: currency transfer friction, difficulty conducting due diligence at a distance, the protracted nature of the conveyancing process, and uncertainty about the reliability of title. The government’s ongoing land titling programme — the fruits of which are only slowly percolating through the system — remained critical to unlocking this latent demand.

Several of the larger real estate agencies had invested in websites and virtual tour technology specifically to serve the diaspora market, and these platforms were beginning to generate measurable traffic. The professionalisation of online property marketing in Jamaica, still in its early stages in 2012, was seen as a structural positive for diaspora-driven transaction volumes over the medium term.

Affordability Watch

The affordability calculus in the Jamaican residential market was stark and, on current trajectories, worsening. The median household income in urban Jamaica was estimated at approximately $900,000 to $1.1 million per annum. A household at the upper end of this range, seeking to purchase a modest two-bedroom unit priced at $6 million — already below the lower bound of most formal sector offerings in Kingston — would face a mortgage payment at commercial rates of approximately $70,000 to $80,000 per month, representing 75-85 per cent of income. The arithmetic simply did not work without NHT subsidy.

The NHT’s concessional rates, ranging from zero per cent for the lowest income beneficiaries to five per cent for those at the ceiling of the scheme, were the mechanism that made ownership possible for the formal sector working class. However, NHT loan limits — which had not kept pace with construction cost inflation — meant that even NHT beneficiaries frequently found themselves with a financing gap between the Trust’s maximum advance and the actual purchase price of available units. The budget’s signal that these limits would be reviewed was therefore welcomed, though the detail remained to be seen.

Looking Ahead

The period to June 2012 will be shaped primarily by the parliamentary debate on the budget and the government’s subsequent capital allocation decisions. The construction industry will be watching closely for any signal that the NHT’s bulk-purchase framework is being formalised, and for evidence that planning approvals in the Kingston Metropolitan Region — a persistent administrative choke point — are being expedited.

On the macroeconomic front, the outcome of Jamaica’s ongoing fiscal negotiations will be the single most important variable for property market sentiment. Clarity on the terms of a new IMF-supported programme — and the credibility of the government’s commitment to the associated conditionalities — would reduce the risk premium currently embedded in commercial lending rates, and might, over time, contribute to a gradual easing of mortgage costs.

There is also the matter of the NHT elections, due in the coming months, which will determine the composition of the Trust’s board and with it the strategic direction of the island’s most important housing finance institution. The political colouring of the incoming board will be closely watched by developers and beneficiaries alike.

In sum, May 2012 finds the Jamaican property market at a familiar crossroads: structurally undersupplied, financially stressed, and waiting on policy clarity that is perpetually just around the corner. The PNP’s first budget has mapped the territory without yet charting the route. The next thirty days will begin to reveal how seriously the new government intends to walk the road it has signposted.