New Government, Familiar Crisis: Rates, Deficits and the Long Road to Ownership — June 2012

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

Month in Brief

• The European sovereign debt crisis deepens through May, with Greek political paralysis and Spanish banking sector stress sending ripple effects through global risk markets and widening the cost of borrowing for emerging and frontier economies including Jamaica.
• The Bank of Jamaica holds its policy rate in the 6-7 per cent corridor through the month, balancing inflation pressures against the need to avoid exacerbating already elevated commercial lending costs that are suppressing mortgage demand.
• Jamaica’s parliamentary budget debates conclude with the passage of the Estimates of Expenditure, cementing the PNP government’s fiscal framework and providing the NHT with its operational mandate for 2012-13.
• Private sector developers attending the Jamaica Real Estate Association’s mid-year meeting report that pre-sales rates for new residential schemes remain below the 60 per cent threshold typically required to trigger construction financing from local banks.
• Building materials costs rise modestly, driven by increases in the price of steel reinforcement and imported finishes, adding to per-unit cost pressures that developers say are already compressing margins to unsustainable levels in the sub-$8 million segment.
• Remittance corridors from the United Kingdom show a slight softening in May, attributed by analysts to cost-of-living pressures on Jamaican communities in Britain, partially offsetting continued strength in flows from the United States and Canada.

Housing Market

The Jamaican residential property market in the May-to-June coverage period displayed the characteristics that have become depressingly familiar to participants over the past three years: thin transaction volumes, a widening chasm between what sellers expect and what buyers can finance, and a rental sector absorbing the overflow of frustrated would-be owners with quiet efficiency.

In Kingston’s established residential corridors — Barbican, Havendale, Constant Spring, Meadowbrook — prices held broadly stable. Vendors in these sub-markets benefit from a persistent shortage of quality stock relative to qualified buyer demand, allowing them to maintain asking prices without significant concession. A well-maintained four-bedroom property in Barbican was being quoted at $25-45 million depending on condition and lot size, a range that has changed little in nominal terms over the preceding eighteen months.

The Portmore market, which serves a large proportion of Kingston’s working and lower-middle-income population, presented a more nuanced picture. Prices in Portmore’s older schemes — Bridgeport, Waterford, Independence City — remained relatively accessible by Kingston standards, with two-bedroom units trading at $4-7 million. However, the commuting burden and the cost of transportation, exacerbated by rising fuel prices, were factors that buyers were increasingly pricing into their location decisions. Agents reported that interest in newer, better-connected developments in St. Catherine and in the hills above Spanish Town was growing, albeit slowly.

On the north coast, the luxury and tourism-adjacent segments retained their premium, with beachfront and hillside properties in the Montego Bay, Ocho Rios and Treasure Beach areas attracting both diaspora buyers and the occasional international purchaser. Quoted prices in these markets were typically US dollar-denominated, providing a degree of natural hedge against Jamaican dollar depreciation.

Government Policy

With the budget passed, the PNP government’s housing policy attention shifted in May from fiscal framing to administrative implementation. The Ministry of Water, Land, Environment and Climate Change, which has oversight of housing policy, was reported to be conducting a comprehensive audit of all government-held land with residential development potential, with a view to identifying parcels that could be made available to the NHT or to approved private developers at concessional rates.

This land audit exercise was welcomed cautiously by the private sector. The Jamaica Real Estate Association and the Jamaica Developers Association had long argued that the single greatest constraint on affordable housing supply was not capital or demand but land: specifically, the unavailability of serviced, titled parcels at prices that allowed for the construction of units within NHT affordability parameters. If the government’s audit identified material volumes of such land and moved expeditiously to release it, developers said they were prepared to respond.

The NHT, for its part, was understood to be reviewing its project approval processes in light of criticism that the Trust had been too slow to commit to new schemes under the previous board. The 2012-13 target of 3,500 new beneficiary mortgages was seen internally as stretching but achievable if administrative processing times could be reduced and if developers submitted viable applications. The Trust’s loan ceiling — widely discussed but not yet revised — remained a constraint on the addressable segment of the market.

Separately, the government reaffirmed its commitment to the land titling programme administered through the Land Administration and Management Programme. Titling backlogs, which affect hundreds of thousands of Jamaican households particularly in peri-urban and rural areas, were cited by Prime Minister Simpson Miller as a priority for the current parliamentary term, given their downstream implications for housing finance access and for household wealth accumulation.

Construction Sector

Construction activity in May remained constrained, though there were select indications of improvement at the margins. The Hardware and Lumber chain, one of the island’s largest building materials retailers, reported volume growth in retail sales suggesting that self-build and extension activity was picking up modestly as the dry season facilitated outdoor work.

In the formal developer sector, the picture was mixed. Developers with schemes already under construction — primarily in St. Catherine, Clarendon and Manchester — were pressing ahead, having secured their financing and NHT commitments before the current tightening cycle. New project initiations, however, remained scarce. Pre-sales in new schemes were running below 60 per cent, the threshold commercial lenders typically require before advancing construction finance, leaving developers caught between a financing condition they could not meet and a market they could not seed without breaking ground.

The government’s infrastructure spending, while constrained by the fiscal position, did include modest allocations for roads serving established residential developments. Improved road access is a material value driver in Jamaican residential property, and infrastructure investment in communities such as sections of St. Andrew and areas around the Highway 2000 corridor was noted by agents as having a positive effect on local property enquiries.

Investment Climate

The global backdrop through May was dominated by the intensification of the European sovereign debt crisis. Greece’s inconclusive elections in May 6 triggered a fresh bout of market volatility, with the possibility of a Greek exit from the eurozone — widely discussed in financial circles as the “Grexit” scenario — generating risk-off sentiment across global asset classes. Spanish bank borrowing costs rose to levels that prompted serious concern about Madrid’s ability to maintain market access without external support.

For Jamaica, the implications were several. First, the cost of external borrowing — already elevated relative to the island’s economic fundamentals — faced further upward pressure as risk appetite globally contracted. Second, the tourism sector, already operating below potential, faced headwinds from reduced discretionary spending by European visitors. Third, the depreciation of the euro against the US dollar affected the real value of remittance flows from the United Kingdom and continental European diasporas.

Against this backdrop, Jamaica’s ongoing negotiations with the IMF over a new programme framework took on additional urgency. A credible, IMF-endorsed fiscal programme was seen in financial markets as a prerequisite for Jamaica to maintain access to external capital on manageable terms. For the property market, the implications of such a programme — conditional on fiscal consolidation measures including potential revenue increases — were complex, but the certainty it would provide was generally seen as a net positive for investor confidence.

Diaspora Dimension

Diaspora engagement with the Jamaican property market showed the characteristic seasonal uptick that typically accompanies the approach of the summer visiting period. Jamaicans living abroad who planned to visit family over the July-August period were, in many cases, using those planned trips as occasions to scout property, meet with attorneys and valuators, and in some cases initiate purchase transactions.

Real estate agents with established diaspora client relationships — particularly those with offices or marketing presences in London, Miami, New York and Toronto — reported an increase in preliminary enquiries ahead of the summer. The categories of interest were varied: retired or near-retirement diaspora members seeking to acquire or upgrade a family home ahead of return; younger second-generation buyers interested in land for long-term investment; and a smaller but growing cohort of buyers looking at rental investment properties in Kingston and the north coast as a source of foreign-currency income.

The exchange rate dynamic was a significant factor for US dollar-earning diaspora buyers. With the Jamaican dollar trading at approximately 87-88 to the US dollar through much of May, the purchasing power of US dollar remittances for property acquisition was materially favourable by historical standards, even if the absolute prices of desirable properties had not declined commensurately in nominal Jamaican dollar terms.

Affordability Watch

The central affordability paradox of the Jamaican housing market crystallised sharply in this review period. The NHT’s concessional mortgage rates — zero to five per cent for qualifying beneficiaries — make home ownership mathematically feasible for a significant portion of the formal sector working population. The problem is not the rate; the problem is the supply of units priced within the envelope that NHT-only financing can reach.

With construction costs for a basic but compliant two-bedroom unit in the Kingston Metropolitan Area running at $4.5-6 million all-in including land, and NHT loan limits set at levels that leave many applicants with a financing gap, the segment of the market that a pure NHT borrower can access without supplementary financing is narrow and becoming narrower as materials costs creep upward. The result is a paradox: a well-capitalised, low-rate lending institution sitting alongside a market in which units affordable to its borrowers are structurally scarce.

The solution, most analysts agreed, required action on both sides of the equation: higher NHT loan limits indexed to construction costs, and an active programme to bring serviced land to the market at subsidised prices to hold down the all-in cost of new units. The budget debate had touched on both issues but had not produced the decisive policy change that developers and beneficiaries needed to see.

Looking Ahead

The next coverage period — June through early July 2012 — will be watched for several developments. The IMF programme negotiations are expected to produce a clearer framework, and any announcement of a new programme would represent a significant positive signal for Jamaica’s fiscal credibility and, by extension, for the medium-term trajectory of commercial interest rates.

The NHT’s mid-year review of its mortgage disbursement performance will be another key indicator. If the Trust is tracking ahead of its 3,500 unit target, it would suggest that the administrative reforms signalled in the budget are taking hold. If it is behind, pressure will mount for a more fundamental review of the Trust’s operational model.

The approach of the summer visiting season will bring an influx of diaspora buyers and lookers, providing a real-time read on overseas demand. Estate agents and developers will be watching conversion rates closely: strong diaspora purchasing in July and August would provide a meaningful boost to transaction volumes in a market that has been running significantly below potential.

Globally, the resolution — or deterioration — of the European crisis will continue to set the tone for risk appetite and capital flows. Jamaica cannot insulate itself from these forces, but a credible domestic programme can at least ensure that the island is positioned to absorb external shocks from a position of relative policy coherence rather than fiscal disarray. The coming weeks will test whether the new government can deliver that coherence.

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