GDP has contracted for a third quarter, the Jamaica dollar has drifted to J$92 against the US dollar, and the negotiating teams in Kingston and Washington have not yet concluded an Extended Fund Facility. The property market has not collapsed — but it has stopped moving forward, treading water on NHT volume and BPO demand while waiting for the macroeconomic architecture to resolve.
Highlights
- Jamaica GDP contracts for third consecutive quarter; 2012 full-year tracking -0.6%
- Dollar drifts to J$92/US$ by quarter end; BOJ managing but not arresting depreciation
- EFF and NDX negotiations ongoing; full agreement expected by early 2013
- Tropical Storm Isaac grazes Jamaica in late August, minimal infrastructure damage
- NHT sustains residential market; commercial bank mortgage volumes flat
- Diaspora remittances rising, supporting household ability to service mortgage payments
There is a particular quality of stillness in a market that is waiting for something. It is not the stillness of saturation — the flat calm of a market where every buyer has bought and every seller has sold at prices both could accept. It is the stillness of suspension, of participants who have assessed the fundamentals, calculated their position, and decided that the sensible thing to do is stand where they are until the weather makes up its mind.
Jamaica’s property market through the third quarter of 2012 was in precisely that suspension. GDP was contracting again — the third successive quarter of negative output, a continuation of the pattern that had made 2012 the most disappointing economic year since the post-crisis trough of 2009. The Jamaica dollar had drifted to J$92 against the US dollar by the close of September, down from J$86 a year earlier, a 7 percent depreciation that was modest by the standards of 2008 but was enough to remind anyone who had financed a property purchase with US dollar borrowings that currency risk was not merely theoretical.
The IMF Extended Fund Facility negotiations were continuing, and the broad outlines of a deal were understood. Jamaica would commit to a primary surplus target of approximately 7.5 percent of GDP sustained over four years, would implement a National Debt Exchange to reduce domestic debt service costs by an additional J$17 billion per year, and would receive in return a four-year programme with access to Fund resources that restored the external credibility the government had been operating without since May. The problem was that “outlines understood” and “agreement signed” are different animals, and until the latter arrived, the market’s wait-and-see mode was rational.
Tropical Storm Isaac moved through the Caribbean in late August, grazing the southern coast of Jamaica and producing moderate rainfall and some coastal flooding before strengthening as it tracked northwest toward the Gulf of Mexico. The damage to property and infrastructure in Jamaica was limited — far less severe than the direct hits of Ivan in 2004 or the twin storms of 2005 — and the insurance claims that resulted were manageable within the capacity of the domestic market. But Isaac served as a reminder of the physical risk embedded in Jamaican real estate, particularly coastal and low-lying properties in parishes exposed to seasonal weather systems. The cost of adequate property insurance in Jamaica had risen steadily since 2004, and the differential between insured and uninsured properties was becoming a meaningful factor in valuation work.
Remittances were a quiet positive. Jamaicans living abroad — concentrated in the United Kingdom, the United States, and Canada — were sending money home at rates that had held up surprisingly well through the global recession and were now recovering as conditions in diaspora labour markets improved. Those flows, estimated at roughly US$2 billion annually, landed disproportionately in the hands of lower-income households in rural parishes and the urban periphery. For property markets, the significance was both direct — remittance-funded construction of modest homes in rural communities remained the largest single category of new residential supply outside the formal developer sector — and indirect: households receiving regular dollar inflows had greater resilience in the face of the fiscal squeeze and were less likely to default on existing mortgage commitments.
The BPO sector continued its methodical expansion of Kingston’s commercial absorption. By mid-2012 the sector was estimated to employ more than 28,000 workers, and the pipeline of new entrants — operators from the United States in healthcare administration, financial services back-office, and customer support categories — showed no sign of exhaustion. The buildings they filled were not the gleaming new-build office towers of a properly functioning development market; they were the refurbished shells of 1970s and 1980s commercial stock, reclad and rewired but still running on the skeleton of infrastructure that a previous generation of Kingston planners had installed. The pent-up demand for purpose-built BPO space was visible in the conversations developers were having with prospective tenants, but the financing conditions for new office construction had not yet made those projects viable without pre-lease commitments that were difficult to obtain in the current uncertainty environment.
The National Land Agency’s titling programme was continuing to expand the universe of formalisable property in Jamaica. In communities that had existed for decades in a legal grey zone — occupying land under longstanding informal arrangements without registered title — the receipt of a formal certificate of title represented a transformation in household economic standing. A parcel with title could be mortgaged, used as security for business loans, rented under enforceable lease, bequeathed with legal clarity. The programme was slow and the backlog was measured in years rather than months, but its cumulative effect on the depth of the mortgageable market was material and growing.
What This Means
The third quarter of 2012 ends with the property market in an uncomfortable but not dangerous equilibrium. NHT lending is sustaining the lower end of the residential market; BPO demand is sustaining the commercial office segment; and the titling programme is quietly deepening the potential buyer pool. What is absent is the catalyst for broad market acceleration. That catalyst — a signed EFF, a completed NDX, a demonstrated post-programme-gap primary surplus — is expected in the first quarter of 2013. If it arrives on schedule and without disruptive exchange rate movement in the interim, the property market should enter 2013 with the structural conditions for a genuine, broad-based recovery. If negotiations extend further, or if an external shock destabilises the dollar before the anchor is in place, the patience of buyers and developers will be tested more severely than it has been so far.
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