There are moments in a building’s life when the structure and its inhabitants reach an unspoken understanding. Both know that the roof needs replacing. Both know that the foundation has shifted. Both have noticed that the walls are carrying stresses they were not designed for. But the building is standing, the roof has not yet collapsed, the foundation has not yet cracked through to the surface — and so the conversations about repair are deferred, and life continues, with a collective quietness that is not peace but its simulacrum. Jamaica, in the summer of 2012, is living in exactly that kind of suspended understanding. The structural problems are visible to anyone who cares to look. The reckoning is coming. But it has not yet arrived.
GDP contracted by approximately 0.5 percent in 2012, following a weak 1.4 percent growth year in 2011. The economy is, by every credible measure, stuck. Unemployment sits above 14 percent of the workforce, with youth unemployment substantially higher. The government’s fiscal position is deteriorating. Debt-to-GDP is approaching the 140-150 percent range. And the conversations about whether Jamaica needs an IMF programme — conversations that politicians conduct with the kind of careful ambiguity that suggests they already know the answer — are becoming impossible to have in whispers.
Into this economic environment, the property market is doing what property markets do when confidence evaporates and credit is expensive: it is waiting. Not declining sharply, not rising, not transacting at volume. Just waiting, with the patience of an asset class that has no choice but to be patient, and the quiet anxiety of sellers who need to sell and buyers who are not sure they should buy.
Reviewing 2011: A Recovery That Was Never Really There
The GDP number for 2011 — 1.4 percent growth — looked, at the time, like the early signal of a recovery from the depths of 2009 and 2010. It was not. It was a statistical artifact of a year in which some recovery from a deeply depressed base was inevitable, and in which the global economic environment briefly appeared to stabilise before the European sovereign debt crisis restarted the global anxiety cycle. By the second half of 2011, the sense that the global recovery was on track had evaporated, and Jamaica’s 1.4 percent turned out to be less the beginning of a trend than a brief pause between one period of weakness and the next.
For the property market, 2011 was the year that a tentative recovery — which had been hoped for by developers and brokers who had been sustaining themselves through the 2009-2010 trough on the faith that things would improve — failed to materialise in any convincing sense. The market moved slightly. There was some activity in the NHT-financed affordable segment. A handful of transactions occurred in the upper Kingston market at prices that suggested some buyers had concluded that the price correction had gone far enough. But the broad mid-market — the three-bedroom townhouse, the modest apartment in an established complex, the family home in a secondary Kingston neighbourhood — remained stuck. Mortgage rates from building societies were running at approximately 11.1 percent in 2011, having fallen from a peak above 12 percent in 2010 but still expensive enough to exclude most working Jamaicans from formal mortgage finance for anything beyond the most modest property.
Remittances had recovered somewhat from their 2009 low, reaching approximately US$2.025 billion in 2011. This was a meaningful recovery from the 11 percent decline of 2009, and it provided a stabilising financial floor for many Jamaican households that would otherwise have been in acute distress. But the composition of remittance use remained predominantly consumptive rather than investment-oriented. The diaspora families who were sending money home in 2011 were primarily covering grocery bills and school fees, not financing property purchases. The investment appetite would return, but only when the macroeconomic environment gave them reason for confidence.
The Rental Market: Where the Pain Is Most Visible
If the sales market in Jamaica in 2011-2012 is best described as suspended, the rental market offers a somewhat more dynamic — and concerning — picture. The premium rental segment has been under pressure since 2009, as the expatriate population has thinned and the corporate housing allowances that support that segment have contracted. Five-bedroom houses in Kingston — the properties that serve diplomats, NGO executives, and senior corporate officers — saw rents fall by approximately 12.4 percent in 2012 from 2011 levels, settling around J$318,511 per month. That is a significant decline in a market that had previously been among the more resilient segments of Jamaica’s property economy.
The middle-tier rental market — two- and three-bedroom apartments and townhouses in Kingston serving the professional middle class — has held up somewhat better, because domestic demand for this type of property is less sensitive to the expatriate cycle. Working Jamaicans who cannot yet afford to buy are renting, and the rental market for modest, well-located residential units in Kingston remains active. But the yield arithmetic for landlords is under pressure. If rents are flat or falling while mortgage interest rates are still above 10 percent, and while the capital values of the underlying properties are stagnant or declining, the investment rationale for residential rental property in Jamaica is the weakest it has been in the post-2000 period.
The resort corridor rental market tells a different story. Vacation rentals in Negril and Montego Bay continue to attract international visitors, and the short-term rental yields on well-positioned coastal properties remain substantially more attractive than the long-term residential yields in Kingston. The villa and vacation home segment of the Jamaican market is, by this measure, the best-performing property asset class in 2011-2012 — though it is not immune to the pressures of a global economy that is still fragile and a tourism sector that, while recovering, has not yet returned to its 2008 peak in revenue terms.
The Construction Sector: Three Percent in a World That Needed Thirty
The construction sector’s performance is the most unambiguous indicator of where the property market actually stands. In the boom years of 2006-07, the real estate and construction sector grew at approximately 36 percent in nominal terms. In 2008, it remained strong at around 30 percent growth. By 2010, that growth had collapsed to approximately 3 percent — a figure so low that it barely covered the inflation in materials costs, meaning that real construction activity was essentially flat or slightly negative. And in 2011, the pattern continued: approximately 3 percent nominal growth in real estate and construction activity, masking a market that was, in real terms, stagnant.
Three percent construction growth when the economy needs thirty is not recovery. It is maintenance. The developers who are active in 2011-2012 are completing schemes that were started before the crisis, not launching new ones. The architectural firms that were designing housing developments in 2007 and 2008 are now designing much smaller projects — individual custom homes for clients who have the cash to build without development finance, or modest NHT-funded schemes where the guaranteed financing reduces the risk of starting.
The consequence of this prolonged construction suppression is twofold. First, it means that the housing supply pipeline is essentially empty. When demand eventually recovers — and it will recover — there will be a shortage of new inventory to meet it, because the years of suppressed construction have created a deficit that cannot be filled quickly. The lead time from developer decision to occupancy in Jamaica is typically two to four years: planning approval, design, infrastructure, construction. If developers do not begin new projects until demand is visibly recovering, the supply response will lag the demand recovery by at least two years, and prices will rise faster than they otherwise would during that lag period.
Second, the prolonged inactivity is degrading the industry’s capacity. Skilled construction workers in Jamaica are mobile. The plumber, the electrician, the block-layer who cannot find work in a depressed domestic market will seek opportunities elsewhere — in Trinidad, in the British Virgin Islands, in the Cayman Islands, where construction has been more active. When the Jamaican market eventually recovers, some of those workers will not come back. The industry will need to retrain and recruit, which adds cost and time to the recovery process.
Mortgage Finance: Still Too Expensive, Slowly Getting Better
The mortgage rate story in 2011-2012 is one of gradual improvement from a very high starting point. Building society rates, which had been above 12 percent in 2010, moved down to approximately 11.1 percent in 2011. Commercial banks followed a parallel trajectory. The Bank of Jamaica, under pressure from a fiscal environment that was pushing up yields on government securities, had limited room to ease monetary policy aggressively. The rate reductions that occurred in 2010-2011 were the product of competitive dynamics among lenders rather than central bank easing — a gradual recognition that at 12 percent mortgage rates, the qualifying buyer pool was so small that growing a mortgage book required either accepting higher risk or reducing rates.
By 2012, building society rates are sitting around 10.2-10.5 percent, and commercial bank rates are in a similar range. These rates are still prohibitively expensive for a large proportion of Jamaican households. A J$8 million mortgage at 10.5 percent over twenty years requires a monthly payment of approximately J$79,000 — a sum that exceeds the gross monthly income of a significant percentage of the formal labour force. The NHT’s administered rates, substantially lower at 3-6 percent depending on income band, partially offset this, but only for properties that fit within the NHT’s loan ceiling of J$4.5 million. Above that ceiling, the full weight of commercial mortgage rates falls on the borrower.
The Macroeconomic Cliff Edge and Its Property Market Implications
The most important thing to understand about Jamaica’s property market in mid-2012 is that its near-term trajectory is entirely dependent on what happens to the macroeconomic situation — and the macroeconomic situation is approaching a decision point that cannot be indefinitely deferred. Jamaica’s debt-to-GDP ratio is approaching 150 percent. The interest burden on that debt is consuming a fiscally unsustainable proportion of revenue. The government’s ability to continue financing its deficits through domestic borrowing, at rates the market will accept, is not infinite.
The decision that is being deferred but not avoided is the decision about whether and when to seek an IMF programme. A programme would impose fiscal conditions that are, in the short term, contractionary — spending cuts, wage freezes, tax increases. These conditions would not be good news for the property market in the immediate term. But they would create the framework for the medium-term improvement that the market ultimately needs: lower debt, lower interest rates, higher investor confidence, a more stable fiscal environment.
The alternative — continued delay, continued fiscal deterioration, possible loss of market access — is significantly worse for the property market than a well-managed adjustment programme. A disorderly fiscal crisis would not produce a property market correction; it would produce a property market collapse, as confidence evaporated, the currency depreciated sharply, mortgage rates spiked, and the institutions that finance property were forced to contract their balance sheets to manage their own solvency.
The market, in mid-2012, does not know which path Jamaica will take. It suspects — correctly, as it will turn out — that an IMF programme is coming. And it is pricing that uncertainty into its behaviour: sellers are holding, buyers are waiting, developers are not starting, and the market is doing exactly what markets do when they are uncertain about a binary outcome whose resolution will define the next several years of activity.
A Forecast for 2013: Brace, Then Begin
This column’s view of 2013 is not comfortable, but it is honest. The year ahead will almost certainly involve Jamaica entering an IMF adjustment programme, completing a second debt restructuring, and implementing fiscal consolidation measures that will, in the short term, reduce government expenditure and constrain household income. The property market will not recover in 2013. The GDP growth rate will remain anaemic. Unemployment will not improve meaningfully. The mid-market will remain largely frozen.
But — and this is the crucial but — the resolution of the fiscal uncertainty is itself a form of progress. The moment Jamaica signs an IMF programme and demonstrates early compliance, the outlook begins to shift. Not immediately, not dramatically, but directionally. The international credit agencies take note. The diaspora community begins to reassess. The financial institutions that have been paralysed by uncertainty about the fiscal trajectory begin to think about deploying capital rather than hoarding it.
Mortgage rates will continue their gradual decline through 2013-2014, as the fiscal programme reduces yields on government paper and the financial institutions face pressure to find productive uses for their capital. The NHT will, this observer believes, eventually improve its loan terms — the political pressure to demonstrate programme benefits to working Jamaicans is real, and improving NHT affordability is one of the least costly ways to do so.
The property market’s recovery will not begin in 2013. But 2013 is the year in which its preconditions begin to be established. The patient investor, the well-capitalised buyer, the developer with the balance sheet to survive another year or two of limited activity: they should begin paying close attention. The worst of this cycle is almost certainly ahead of us, not behind us. But the worst is also close to its end. When it passes, the market that emerges will be building on a foundation — however painfully poured — that is finally solid.
The building’s structure is compromised. Everyone in it knows this. But the architect is on his way, the assessment is about to begin, and the repair, however long overdue and however expensive, is finally coming. In Jamaica’s property market, that is about as much cause for optimism as 2012 will allow. Take it.
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