Mortgage Rates, NHT Reform, and a Cautious Market: Jamaica Homes Monthly Housing & Development Review — June 2012

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

Month in Brief

• The Bank of Jamaica maintained its benchmark rate in the 6–6.5 percent range through May, offering no relief to borrowers facing commercial mortgage rates of 11–14 percent; analysts saw little prospect of meaningful cuts before year-end.
• The PNP administration signalled an intent to review NHT contributor benefit levels and loan ceilings, with the Ministry of Housing indicating consultations were under way ahead of anticipated policy announcements later in 2012.
• Private-sector developers in the St Catherine corridor continued work on a small number of residential schemes, though new site-start activity remained depressed relative to pre-2009 levels.
• Kingston’s mid-market property segment saw slightly improved enquiry volumes in May compared with April, though conversions to completed transactions remained low as prospective buyers struggled to assemble bridging finance.
• The Jamaican dollar depreciated modestly against the US dollar during May, pushing up the landed cost of steel, fixtures, and specialist construction materials and adding pressure to developer project budgets.
• Rental demand in Kingston, Montego Bay, and Spanish Town remained firm, as would-be buyers deferred purchase decisions, sustaining a landlord market in well-located urban residential units.

Housing Market

May 2012 brought tentative signs that Kingston’s residential property market was stabilising after several months of particularly subdued activity. Enquiry levels from prospective purchasers — a leading indicator that estate agents track ahead of formal listing viewings — edged upward compared with April, suggesting that some buyers who had adopted a wait-and-see posture following the December 2011 general election were beginning to re-engage with the market as the new PNP government’s economic programme became clearer.

Yet enquiries and completions remained far apart. The fundamental bottleneck — the inability of the majority of prospective purchasers to access mortgage finance at rates that made the arithmetic of homeownership viable — had not shifted. Commercial lending institutions reported no material change in their mortgage origination volumes, and the spread between the BOJ benchmark rate and retail mortgage rates remained wide, reflecting the elevated risk premiums that banks applied to long-duration lending in an economy carrying significant macroeconomic uncertainty.

In Montego Bay and its surrounding parishes, the property market was somewhat more animated, buoyed by tourism-sector activity and the particular appeal of the north coast to diaspora buyers. A cluster of gated-community and townhouse schemes in the Ironshore and Rose Hall corridors continued to draw attention from the Jamaican-American and Jamaican-British communities, with developers in those areas reporting a higher share of overseas-sourced enquiries than their Kingston counterparts.

At the entry level of the market, the fundamental mismatch between what new households could afford and what was available for purchase or rent remained acute. The private rental market in Kingston’s urban core continued to absorb demand that the ownership market could not accommodate, with monthly rents for modest one-bedroom units in Portmore and Spanish Town ranging from JM$15,000 to JM$25,000 — a material outgoing for households earning near the minimum wage.

Government Policy

The month of May saw the PNP government move from broad housing rhetoric toward the early stages of policy articulation. The Ministry of Housing, which sits within the broader portfolio framework of the Simpson Miller cabinet, indicated that consultations were under way with the NHT board and with housing sector stakeholders on possible adjustments to loan ceilings, eligibility thresholds, and the interest rate banding structure that governs what contributors pay on their mortgages.

Any upward revision to the NHT’s maximum loan amount — which stood at approximately JM$4.5 million in early 2012 — would represent a significant intervention in the affordability equation. Even a moderate increase, if accompanied by maintained or reduced interest rates within the Trust’s zero-to-five-percent structure, would bring a meaningful additional cohort of moderate-income earners within reach of homeownership without recourse to commercial top-up financing. The fiscal cost of such a move, in terms of the implicit subsidy carried on the NHT’s books, was a point of active discussion within the administration.

On the land supply side, the National Land Agency continued its programme of title regularisation across informal settlements, though the scale of the intervention remained modest relative to the estimated backlog of hundreds of thousands of untitled or incompletely titled properties across the island. The political significance of land titling — as both a development tool and an electoral asset in communities where land tenure was contested — was well understood by the PNP administration, which had made settlement upgrading and titling a component of its 2011 election manifesto.

Construction Sector

May brought little relief to Jamaica’s construction industry. Input costs remained elevated, with Caribbean Cement Company’s bulk prices to contractors holding firm, and imported materials — steel rebar, PVC pipe, electrical components — facing upward pressure from the modest weakening of the Jamaican dollar during the month. Fuel prices, a significant component of both transport and on-site energy costs, remained at levels that eroded project margins.

The formal residential development pipeline for the remainder of 2012 looked thin. Industry sources estimated that fewer than 1,500 new formal housing units were likely to be completed island-wide during the calendar year, far below the annual increment needed to make a meaningful dent in the estimated 100,000-unit deficit. The gap was being partially offset by informal construction — self-build activity, extensions, and subdivision of existing dwellings — but such additions to the housing stock were uneven in quality and concentrated in areas where land was cheapest, often in zones with inadequate road access, water supply, or waste management infrastructure.

A modest positive note came from the tourism sector, where hotel and resort refurbishment activity in St James and Portland provided construction employment and kept a small number of specialist subcontractors active. The skills developed in tourism construction — tiling, finishing, joinery — are broadly transferable to residential work, and the maintenance of that skilled labour base during a slow residential period was noted by industry observers as a latent asset for any future uptick in housing activity.

Investment Climate

Jamaica’s investment climate in May 2012 was shaped by the government’s ongoing engagement with the International Monetary Fund. The country’s precautionary Stand-By Arrangement with the Fund was the backdrop against which all public-sector spending decisions — including housing investment — were made. The IMF’s emphasis on fiscal consolidation and primary surplus targets created a tension with the social spending ambitions of the new PNP administration, a tension that would need to be resolved in the medium-term economic programme that the government was expected to present to parliament in the second half of the year.

For private investors in Jamaican real estate, the IMF context was a double-edged factor. On the one hand, a credible fiscal adjustment programme would, over time, contribute to lower interest rates and a more stable currency, improving the return on long-duration assets such as property. On the other hand, the austerity measures associated with IMF conditionality typically compressed disposable income in the short term, reducing effective demand for housing and slowing the pace of market recovery.

Foreign direct investment inflows into Jamaican real estate remained focused on the tourism corridor, with limited appetite from purely commercial overseas investors for the residential segment outside of the premium villa market. The Jamaica Promotions Corporation continued to market the island as an investment destination, with real estate forming part of the broader pitch to the diaspora and to Caribbean-focused investment funds.

Diaspora Dimension

May reinforced the centrality of the Jamaican diaspora to the island’s housing market. Remittance flows for the month were estimated to be tracking in line with the strong first-quarter performance, maintaining the approximately US$1.8–1.9 billion annual run rate that had characterised the years since the 2008 global financial crisis first disrupted the previous peak of around US$2 billion per annum.

For the housing market, diaspora engagement was visible in two distinct modes. The first was the direct remittance channel: regular transfers to family members that supported ongoing mortgage payments, construction costs, or rental outlays for relatives in Jamaica. The second was the periodic investment mode: diaspora members who saved over several years abroad to purchase or build a retirement or family property in Jamaica. This second group was an important driver of demand in rural parishes and in the premium segments of resort towns such as Negril and Port Antonio.

The NHT continued to market its External Financing Mortgage Programme to non-resident contributors, recognising that the diaspora represented a pool of financially capable homebuyers who were often frustrated by the procedural complexity of completing transactions from abroad. Simplification of the power-of-attorney and title-registration process for overseas purchasers was identified by NHT representatives as a priority for the coming months.

Affordability

The affordability calculus in May 2012 was unchanged in its fundamentals from the previous month, but the data was sharpened by a number of reports and surveys circulating within the housing policy community. Research from academic and civil society sources reinforced what market participants already knew: the gap between household incomes and housing costs in Jamaica had widened over the preceding decade, driven by a combination of inflation in construction materials, land price appreciation in urbanising areas, and income growth that consistently lagged both inflation and property values.

The effective affordability threshold for formal mortgage finance — the income level at which a household could service an NHT mortgage at the standard rate without consuming more than a third of gross income — was estimated to correspond to a monthly earnings level of approximately JM$35,000–40,000 in 2012. That threshold, while not unreachable for dual-income households in formal employment, excluded the majority of single-income households and virtually all households dependent on informal or irregular earnings. The implication was that the formal homeownership market in Jamaica was structurally accessible to only a fraction of the population that needed housing.

Looking Ahead

June 2012 will be a month for watching two sets of signals. The first is from the BOJ: any indication that monetary policy may ease before year-end would cascade quickly into commercial mortgage rate expectations and potentially stimulate deferred purchase decisions. The second is from the Ministry of Housing and the NHT: the pace at which the new administration converts its consultative processes into gazetted policy changes on loan ceilings and interest rate banding will indicate how seriously and how urgently the PNP intends to address the affordability gap that defines its housing inheritance. The market enters June cautious but not without hope.