High Rates, Low Output: The NHT in Jamaica’s Age of Fiscal Restraint — August 2013

Publication Date: 3 August 2013 | Coverage Period: 3 July–2 August 2013 | Category: Monthly Review

Month in Brief

• IMF completes first quarterly EFF review; Jamaica confirmed broadly on track with programme benchmarks.
• NHT Consolidated Fund transfer remains subject of active public debate and parliamentary scrutiny.
• Bank of Jamaica holds policy stance; commercial mortgage rates unchanged in 11–14 per cent range.
• Residential transaction volumes remain thin as buyer caution extends into the summer months.
• Tourism sector reports modestly improved summer arrivals, providing indirect support to resort property.
• Construction sector employment softens further; cement distributors report below-average seasonal demand.

Housing Market Overview

The completion of the IMF’s first quarterly review of Jamaica’s Extended Fund Facility, confirmed in late July, was the single most closely watched event for the Jamaican economy during the coverage period of this edition. The review’s conclusion — that Jamaica had met the key quantitative performance criteria and structural benchmarks for the first quarter of the programme — was greeted with measured relief rather than celebration by the business community. It is, as one Kingston-based economist put it, “confirmation that the operation was performed correctly, not that the patient is recovering.”

For the housing market specifically, the review’s positive outcome changes the near-term calculus in one important respect: it removes, at least temporarily, the tail risk of an abrupt programme breakdown and the associated currency and liquidity shock that would follow. That risk had been weighing on private sector decision-making — dampening both buyer appetite and developer willingness to commit to new projects. Its removal does not flip a switch, but it does provide a marginally more stable operating environment in which lenders, buyers, and developers can plan.

Against this backdrop, the residential market through July continued along the same subdued trajectory that has characterised it since the beginning of the year. New mortgage applications at commercial banks were running below the corresponding period of 2012 — itself not a strong year — and estate agents in the Corporate Area and St Andrew reported that enquiry levels, while maintained, were converting to offers at a slower rate than in more benign conditions. The mid-market — properties in the JMD 6–12 million range — is effectively frozen by the gap between commercial lending rates and what working households can service.

Government Policy: Reading the First Review

The Government of Jamaica under Prime Minister Portia Simpson Miller has invested considerable political capital in the EFF programme, framing fiscal adjustment as the necessary precondition for the sustained growth that will ultimately benefit all Jamaicans, including those locked out of the housing market by high rates and stagnant wages. The successful first review is a point of validation for that strategy, and the Government has been careful to communicate it as such.

What the first review does not address — and what the housing sector most urgently requires — is a credible medium-term path toward lower interest rates. The Bank of Jamaica’s policy rate, currently in the 6–7 per cent range, provides the floor for commercial lending rates that ultimately drive mortgage pricing. Even if commercial banks were to compress their margins — a step they show no current disposition to take — the arithmetic of a 6 per cent policy rate still produces mortgage rates that are punishing for the majority of potential buyers. The path to a 7 or 8 per cent commercial mortgage market runs through a sustained reduction in the policy rate, which in turn requires a durable and credible fiscal adjustment. That chain of causation is real, but its timeline extends well beyond the current political cycle.

The Ministry of Housing has, in the meantime, continued to advance a number of initiatives at the margin. A revised framework for the regularisation of informal settlements — addressing the legal and infrastructural status of communities that have grown up outside the formal planning system — was under active development during the coverage period. Such regularisation, if successful, would expand the inventory of properties that can be mortgaged and transferred, potentially unlocking a significant pool of latent demand. Progress, however, has been slow.

The NHT Controversy: Where Things Stand

The proposed transfer of funds from the National Housing Trust’s Consolidated Fund to central government revenues continued to be the dominant housing policy story of the coverage period. The controversy has acquired a sharper edge in recent weeks, with the Opposition JLP intensifying its parliamentary attacks on the proposal and civil society organisations — including the Jamaica Confederation of Trade Unions and various professional bodies — adding their voices to the chorus of concern.

The NHT, it bears repeating, is not simply a government housing agency. It is a contributory fund: workers and employers pay into it through payroll deductions, with the expectation that contributors will be able to access mortgage finance at subsidised rates when they require it. A transfer of its accumulated surplus to general revenues therefore has a dimension that goes beyond the usual debates about public expenditure priorities. It raises the question of whether the contributions made by workers over many years to a specific purpose can legitimately be redirected to a different purpose, even under conditions of fiscal stress. That question has not been definitively answered, and it is one that the courts may ultimately be called upon to resolve.

As of early August, the Government has not formally abandoned the transfer proposal, but neither has it moved to implement it. The political and legal risks appear to be serving as a brake on executive action. The NHT itself has maintained operational normalcy throughout — processing applications, disbursing loans, and completing construction on scheduled schemes — but the cloud of uncertainty over its capital position is not without effect. Some developers who rely on NHT end-financing as an exit route for their units have reported that buyers are asking more questions about NHT’s capacity to deliver.

Construction Activity

The construction sector’s performance through July was, in sum, the performance of a sector waiting for a signal that has not yet arrived. Cement sales — a reliable leading indicator of residential construction activity — were running below the corresponding period of 2012, which was itself a year of constrained output. Hardware retailers in the major urban centres reported that the small-contractor and self-build market, which accounts for a substantial share of total residential output in Jamaica, was operating at a reduced tempo. Households that might otherwise have used holiday-period savings or remittances to begin or extend construction projects appeared to be holding off, citing uncertainty about their economic prospects under the adjustment programme.

Larger-scale commercial and residential developers presented a more varied picture. A small number of projects in the mid-to-upper price range in St Andrew, St James, and along the Portmore corridor remained active, supported by a combination of advance sales and developer financing. NHT construction on behalf of contributors proceeded on schedule in several parishes. But the speculative development pipeline — projects conceived in anticipation of demand rather than against confirmed orders — is essentially empty.

Investment Climate

Investor sentiment toward Jamaican property improved marginally during the coverage period, largely on the back of the successful IMF review. The spread on Jamaica’s US-dollar sovereign bonds tightened somewhat following the review’s completion, and anecdotal reports suggest that a small number of foreign investors who had been watching Jamaica from the sidelines began to make preliminary enquiries about residential and commercial property in Kingston and the resort corridor.

These are early-stage signals and should not be overread. The conditions that would attract sustained foreign investment in Jamaican residential property — a functioning secondary mortgage market, reliable title insurance, clear and efficient conveyancing procedures, and a credible track record of programme compliance — are present in nascent or partial form at best. The single successful IMF review, while welcome, is the beginning of a credibility-building exercise rather than its completion. Sustained investment will require sustained compliance over multiple review cycles.

Diaspora Dimension

The summer months traditionally bring an uptick in diaspora-related property activity, as Jamaicans living abroad return for extended visits and use the occasion to inspect properties, meet with estate agents, and in some cases complete purchases. The summer of 2013 has followed this seasonal pattern, with estate agents in tourist-adjacent areas — Montego Bay, Negril, Ocho Rios, and the Blue Mountains corridor — reporting above-average enquiry levels from the returning diaspora community.

The continuing depreciation of the Jamaican dollar enhances the purchasing power of diaspora buyers, who are typically earning in hard currency. A buyer receiving US dollars from employment in the United Kingdom, the United States, or Canada can acquire significantly more Jamaican real estate per foreign-currency unit than was possible five years ago. This currency effect is particularly pronounced in the retirement and second-home market, where buyers are less dependent on local mortgage finance and more sensitive to asset pricing in dollar terms. Developers and agents who serve this market are cautiously optimistic about the remainder of 2013.

Affordability

The affordability picture for the majority of Jamaicans seeking to enter the housing market has not materially improved over the coverage period. The three principal constraints — high mortgage rates, stagnant incomes, and the chronic undersupply of adequately priced units — remain as firmly in place as they were at the beginning of the year. The 100,000-unit housing deficit, a figure that has acquired the status of a policy shorthand for the sector’s structural challenges, is if anything being sustained rather than reduced by current conditions.

The NHT continues to represent the primary mechanism through which low- and middle-income Jamaicans can access the market on viable terms. Its zero-to-five per cent mortgage rates remain a transformative affordability tool: at four per cent, for example, a household can service a JMD 8 million mortgage for less than a third of what the same loan would cost at a commercial bank’s best rate. The institution’s continuing operational effectiveness is therefore not merely a matter of policy preference but of practical necessity for hundreds of thousands of Jamaican families. Any development that compromises that effectiveness — including the Consolidated Fund transfer, if implemented — would have immediate and concrete consequences for housing access at the lower end of the market.

Looking Ahead

The September edition of this review will assess the housing sector’s performance through August, a month that will see the summer diaspora season conclude, the academic year resume, and the Government prepare its first major post-review policy communications. Key variables to watch include any movement on the NHT transfer question, the Bank of Jamaica’s next policy rate decision, and the pace of residential construction activity as the second half of the year begins.

The broader question — whether the EFF programme’s successful first review marks the beginning of a genuine stabilisation that will eventually feed through to lower rates, improved affordability, and a more active residential market — remains open. The evidence to date is consistent with stabilisation but not yet with recovery. The housing sector, patient by nature, will continue to wait.