Adjusting to the New Normal: Jamaica’s Housing Sector at the Close of Summer 2013 — September 2013

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

Month in Brief

• Summer diaspora season concludes with estate agents reporting strongest seasonal enquiry in three years.
• Jamaica prepares for second IMF quarterly review as fiscal benchmarks remain broadly on track.
• NHT Consolidated Fund transfer proposal unresolved; legal challenges remain a live possibility.
• Bank of Jamaica maintains cautious stance; no movement in commercial mortgage rate environment.
• Tourism arrivals for summer season reported up modestly, supporting northern coast property demand.
• Academic year commencement drives renewed rental demand in Kingston and Montego Bay corridors.

Housing Market Overview

August 2013 provided the clearest evidence yet that Jamaica’s residential property market is operating in two distinct registers, with starkly different dynamics animating each. The first register — the segment accessible to ordinary Jamaican families earning local-currency incomes and dependent on commercial or NHT mortgage finance — remained as subdued as it has been for the past eighteen months. The second register — the diaspora, retirement, and high-end market, where buyers bring hard-currency purchasing power and limited dependence on local financing — showed genuine seasonal animation, with August volumes in certain sub-segments running ahead of both 2012 and 2011 comparisons.

This bifurcation is not a new phenomenon; it reflects the structural architecture of Jamaican society and the particular ways in which the IMF adjustment programme interacts with different income and wealth cohorts. But it has become more pronounced over the coverage period of these reviews. The adjustment programme, by design, compresses the purchasing power of public-sector wage earners and constrains the capital available for NHT lending, while simultaneously — through currency depreciation — enhancing the relative attractiveness of Jamaican assets to hard-currency holders. The housing market is, in this sense, a mirror of the adjustment process itself: painful for the majority, arguably opportunistic for those with foreign exchange.

In the Corporate Area, estate agents report that the rental market has come to life with the commencement of the new academic year at the University of the West Indies, the University of Technology, and the various community colleges and professional training institutions that draw students from across the island. Demand for furnished one- and two-bedroom units in the New Kingston, Half Way Tree, and Papine corridors is running at or slightly above year-earlier levels. Landlords in these areas have in some cases achieved modest rental increases, the first in several years. Whether this reflects genuine improvement in underlying conditions or simply the particular dynamics of student housing at the start of an academic year is not yet clear.

Government Policy: Towards the Second Review

The Government of Jamaica is approaching the second quarterly review of the IMF Extended Fund Facility with, by all appearances, a degree of quiet confidence. The fiscal targets for the first half of the programme year were met — an achievement that required, among other things, the containment of the public-sector wage bill, the compression of capital expenditure, and the maintenance of tax revenue flows that have proven more resilient than some pessimists feared. The second review, expected in the coming months, will assess performance against the same benchmarks for the subsequent quarter.

Prime Minister Portia Simpson Miller has maintained the Government’s public narrative around the programme: adjustment is necessary, the burden is being shared as fairly as possible, and the medium-term dividends — lower rates, restored growth, expanded employment — will justify the short-term costs. This narrative is not universally accepted; the trade union movement, in particular, has grown more vocal in its opposition to the wage freeze as the summer has progressed, and some community organisations in urban areas have raised concerns about the cumulative impact of spending cuts on social services. Managing these pressures while maintaining programme compliance will be the dominant political challenge of the second half of 2013.

For the housing sector, the most consequential policy question of the coming months is whether the Government will proceed with the NHT Consolidated Fund transfer and, if so, in what form and on what timeline. A second question concerns the pace of land regularisation and informal settlement upgrading, which has the potential to bring a substantial number of properties within the reach of formal finance but which requires sustained administrative commitment that can be difficult to maintain in a period of budget compression.

The NHT: Resolution Deferred

The NHT Consolidated Fund transfer controversy, which has animated housing policy debate since the spring, enters September without resolution. The Government has not formally withdrawn the proposal, and the fiscal arithmetic that motivated it — the need to find additional revenues or reduce the deficit through asset transfers — has not changed. At the same time, the political and legal obstacles to implementation have, if anything, grown more formidable over the summer, as the breadth of the opposition to the proposal has become clearer.

Legal opinion sought by several trade union federations and civil society groups suggests that a transfer of NHT funds to general revenues without amendment to the NHT Act would be challengeable in the courts. The Government’s legal advisers have taken a different view, but the prospect of protracted litigation adds a further layer of uncertainty to what is already a complex policy question. Several MPs within the governing PNP have privately expressed reservations about the proposal, concerned about its impact on their constituents and the political cost of being seen to raid a fund that workers regard as, in some sense, their own.

The NHT itself has continued to operate normally through August. Mortgage disbursements, construction completions, and new applications have all proceeded on established timelines. The institution’s public communications have been careful to maintain the confidence of contributors while avoiding direct commentary on the political debate over the transfer. This balancing act cannot continue indefinitely, but it has so far preserved the operational functionality of the institution that the housing sector most depends upon.

Construction Activity

The construction sector through August was characterised by two distinct dynamics. In the informal and small-contractor segment — the self-build and incremental housing market that accounts for the majority of actual new residential units created in Jamaica each year — activity picked up modestly as the summer season brought remittance inflows, holiday savings, and in some cases the physical presence of diaspora family members who used their visits to advance projects that had been stalled during the year. This seasonal pulse is familiar and should not be overinterpreted, but it is real.

In the formal construction sector, the picture remained muted. The Contractors Association of Jamaica has noted that tender volumes from both the public and private sectors were below long-run averages through the summer, and that competition for available contracts has been intense, with significant pricing pressure driving margins to levels that are sustainable only for contractors who can manage their overheads very efficiently. Several smaller contracting firms have exited the formal sector or significantly reduced their operations during 2013, a development that will leave the industry with reduced capacity when the eventual upturn in demand arrives.

The brightest spot in the construction landscape remains the ongoing NHT programme, supplemented by a small number of private schemes in the mid-to-upper price range and the initial groundwork on a handful of hotel expansion projects on the north coast — activity that is connected to the tourism sector’s modest recovery rather than to the residential housing market directly, but which provides employment and supply-chain activity that has positive spillover effects.

Investment Climate

The investment climate for Jamaican property through August continued the marginal improvement that followed the first IMF review. International bond spreads remained relatively contained, the Jamaica Stock Exchange maintained broadly positive momentum, and the business media carried occasional reports of renewed offshore interest in both commercial and residential Jamaican property. None of this has yet translated into a measurable increase in completed foreign-linked residential transactions, but the direction of sentiment has shifted perceptibly from the acute anxiety of the pre-programme period.

Domestic institutional investors — the insurance companies, pension funds, and credit unions that together manage a substantial pool of long-term Jamaican savings — have been marginally more active in the property market over the summer, with several institutions completing or advancing negotiations on commercial and mixed-use acquisitions. Residential property, however, remains a secondary focus for most institutional investors: the absence of standardised valuation frameworks, the persistence of title issues in some areas, and the illiquidity of the asset class limit its attraction relative to government securities in a high-rate environment.

Diaspora Dimension

The summer of 2013 will likely be remembered, from a property market perspective, as the season when the diaspora buyer re-emerged as an active market participant after several years of watching from the sidelines. Estate agents who specialise in returning residents and foreign-based Jamaicans reported a notably busier season than in either 2011 or 2012, with particular activity in retirement-oriented communities in the Blue Mountains foothills, the Negril corridor, and the Ocho Rios area.

The currency factor remains the primary driver. At the exchange rates prevailing through August 2013, a Jamaican-British buyer or a Jamaican-American can acquire property in Jamaica at effective US-dollar prices that are among the lowest in the English-speaking Caribbean. When set against the backdrop of improving macroeconomic credibility conferred by the IMF programme, this creates a compelling value proposition for buyers who have a personal or sentimental connection to Jamaica and who are prepared to accept the illiquidity and management complexity that Jamaican property ownership entails. The challenge for the sector is to convert this cyclical improvement in diaspora interest into a sustainable institutional framework — better title services, more accessible mortgage products denominated in foreign currency, and a clearer regulatory pathway for non-resident owners — that will outlast the current currency differential.

Affordability

For the domestic buyer dependent on local-currency income and commercial or NHT mortgage finance, September 2013 offers no material improvement in affordability compared to the beginning of the year. Commercial mortgage rates have not moved, household incomes have been constrained by the wage freeze and broader economic stagnation, and the supply of adequately priced units remains chronically short of the demand that would exist at lower price points. The 100,000-unit deficit persists, and the conditions that might address it — a functioning and affordable mortgage market, adequate public investment in serviced land and infrastructure, and a construction industry with the capacity and incentive to build at scale in the lower price ranges — are all contingent on a sustained improvement in the macroeconomic environment that remains, at best, a medium-term prospect.

It is worth noting, in this context, that the affordability problem is not simply a matter of mortgage rates. Land costs in and around Kingston have, paradoxically, been more resilient to the economic downturn than might have been expected, sustained in part by the relative scarcity of legally titled and serviced lots within reasonable commuting distance of the capital’s employment centres. A comprehensive response to Jamaica’s housing deficit would require interventions on the supply side — land assembly, servicing, and release — as well as on the demand side through subsidised finance. The current policy framework, focused primarily on the NHT as a demand-side instrument, addresses only part of the problem.

Looking Ahead

The final months of 2013 will be shaped by two overriding variables: the outcome of the IMF’s second quarterly review, and the Government’s decision on the NHT transfer. A successful second review, like the first, will not transform the housing market but will maintain the platform of macroeconomic stability on which a gradual improvement in conditions depends. Resolution of the NHT controversy — in whichever direction — will remove a significant source of policy uncertainty that has weighed on the sector through the year.

Beyond these immediate variables, the housing sector will be watching for any signs of movement in Bank of Jamaica rate policy, which remains the single most important lever for improving affordability over the medium term. There is no expectation of near-term rate reductions — the inflation and exchange rate environment does not yet permit them — but the direction of travel, as fiscal adjustment continues, is gradually toward lower rates. When that transition begins in earnest, the housing market will be among its principal beneficiaries. For now, the sector continues to adjust to the new normal: subdued, bifurcated, patient, and watching.