Season’s End and Slow Markets: Jamaica Housing Sector Navigates Fiscal Headwinds — October 2012

Publication Date: October 3, 2012 | Coverage Period: September 3–October 2, 2012 | Category: Monthly Review

September in Brief

• Jamaica’s housing market remains subdued as the government navigates IMF pre-programme conditions.
• NHT continues to process applications at steady rates, providing a critical buffer against high commercial lending costs.
• Hurricane season peaks in September; Jamaica spared major storms but regional alerts elevate property insurance awareness.
• PNP government reviews NHT transfer and investment policy as part of broader fiscal consolidation planning.
• Commercial mortgage rates hold at 11–14 per cent, maintaining significant affordability gap versus NHT rates.
• Remittance inflows from the diaspora remain the dominant source of down-payment savings for lower-income households.

Housing Market Overview

Jamaica’s residential property market entered October in a condition broadly familiar to practitioners across the island: cautiously active at the top end of the market, constrained by affordability pressures in the middle, and dependent almost entirely on the National Housing Trust’s concessionary lending machinery for transactions in the lower-income segments. The post-Olympics optimism that lifted national sentiment through August and into September has moderated as the economic realities of a stagnant growth environment reassert themselves.

Transaction volumes across Kingston, St. Andrew and the major urban parishes have tracked at levels consistent with the subdued activity seen through much of 2012. Agents report that buyer enquiry is sustained, reflecting genuine pent-up demand, but that the conversion rate from enquiry to closed transaction remains constrained by financing limitations and the persistent mismatch between asking prices and what most households can actually service on current incomes. The exchange rate, stable at approximately J$95–100 to the US dollar, has provided some reassurance to investors pricing assets against US dollar benchmarks, but the domestic macroeconomic environment offers limited cause for optimism.

Government Policy

The PNP administration of Prime Minister Portia Simpson Miller continues to navigate the tension between its social housing commitments and the fiscal constraints that accompany the government’s engagement with the International Monetary Fund. The administration, which entered office in January following the PNP’s convincing December 2011 election victory, inherited a debt-to-GDP ratio in excess of 130 per cent and interest payment obligations absorbing nearly 10 per cent of GDP annually — a burden that leaves minimal fiscal headroom for discretionary spending on housing.

Government officials have been careful to maintain the rhetorical and practical commitment to NHT programmes, recognising that the Trust represents the most visible and politically significant element of the state’s housing policy architecture. The PNP’s electoral base in urban and peri-urban communities is heavily dependent on access to affordable housing, and any perception that the government is diluting NHT benefits would carry significant political costs.

NHT Activity

The National Housing Trust continues to operate as the dominant force in Jamaica’s formal mortgage market. With loan rates between 0 and 5 per cent and loan limits in the range of J$4.0–4.5 million, the Trust provides financing on terms that no commercial institution can approach. The volume of NHT applications continues to outpace the Trust’s approved loan allocations, reflecting the scale of unmet housing demand among the contributor base.

The Trust’s interim finance programme, which provides developers with funding for construction at concessionary rates against the requirement that completed units are offered to NHT contributors, remains an important mechanism for adding to the affordable supply pipeline. Developers participating in the programme report that construction cost pressures — driven by imported materials priced in US dollars against a weakening Jamaica dollar — continue to squeeze margins even with the benefit of preferential financing.

Construction Sector

Jamaica’s construction sector is performing modestly, held back by the same fiscal constraints that limit government capital expenditure and by the high cost of imported building materials. Cement, steel and roofing products are all priced with reference to US dollar inputs, and the exchange rate’s persistent weakness against the US dollar translates directly into higher construction costs for developers and self-build households alike. Industry associations are pressing the government to review import duties on key construction materials, an issue that resurfaces perennially in budget submissions but rarely results in material relief.

Despite these headwinds, private sector residential construction in upper-income areas continues, driven by the diaspora and local professional classes whose income and savings are partially denominated in or benchmarked to US dollars. New developments in premium Kingston addresses and the resort corridors of Montego Bay and Ocho Rios remain viable for developers targeting this segment.

Hurricane Season and Property Risk

September is statistically the most active month of the Atlantic hurricane season, and Jamaica’s proximity to typical storm tracks means that the period from August through October concentrates the island’s annual weather risk into a three-month window. The 2012 season has been above average in named storm activity, though Jamaica had been spared a direct hit entering October. Property insurers note that hurricane awareness, and with it demand for adequate structural coverage, tends to correlate with recent regional storm activity; a busy season in the Caribbean basin — even without a direct Jamaica impact — tends to prompt some households to review their coverage positions.

Diaspora and Investment

Remittance inflows remain the most powerful single driver of housing demand in Jamaica’s lower and middle segments. The US$1.9 billion flowing annually from the diaspora — primarily from the United States, United Kingdom and Canada — underpins both household consumption and, critically, the accumulation of down-payment savings that enable NHT loans to be activated. Real estate agents serving the diaspora market report sustained interest in Kingston residential properties and in retirement or holiday properties on the north coast, with many overseas-based Jamaicans using the relatively stable US-dollar-benchmarked property market as a hedge against Jamaica dollar depreciation.

Affordability

The fundamental affordability challenge in Jamaica’s housing market is structural rather than cyclical. With median household incomes in the J$600,000–800,000 annual range for urban households, and entry-level formal housing typically priced from J$6–8 million, the debt service burden at commercial mortgage rates is insurmountable for the majority of households without NHT assistance. Inflation running at 8–10 per cent compounds the difficulty, as rising living costs reduce the household surplus available for mortgage servicing. The Bank of Jamaica’s policy rate, at approximately 6–7 per cent, reflects the difficulty of managing inflation in a highly import-dependent economy with a persistently weak currency.

Looking Ahead

The October outlook for Jamaica’s housing market is one of cautious continuity. The government’s ongoing fiscal consolidation efforts are unlikely to produce either significant new housing investment or material cuts to existing NHT programmes in the immediate term. Market participants will be watching the Bank of Jamaica’s monetary policy signals and any developments in the IMF discussion that might signal the fiscal path ahead. The hurricane season formally runs through November 30, and with the North Atlantic producing significant storm activity in 2012, the sector’s risk managers will not relax until the seasonal window closes.

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