Rates Edge, Market Waits: Jamaica’s Housing Sector Navigates the EFF’s Second Quarter — September 2013

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

Month in Brief

• Bank of Jamaica signals further policy rate reductions as inflation continues its gradual descent.
• Commercial mortgage rates remain 11–14%; the transmission from BOJ easing to banks is slow.
• NHT scheme intake processes open for select St Catherine developments; oversubscription expected.
• Construction sector reports modest uptick in private enquiries but no material acceleration in starts.
• Inflation tracking toward 9%; wage freeze holds real incomes flat, constraining housing demand.
• Second IMF quarterly review approaches; performance criteria broadly expected to be met.

Housing Market Overview

August 2013 was a month of incremental signals rather than decisive shifts for Jamaica’s residential property market. The Bank of Jamaica has begun the cautious process of easing its policy rate, responding to the gradual decline in inflation from the peaks recorded earlier in the year. But the transmission of central bank rate decisions into commercial mortgage pricing has historically been slow in Jamaica’s financial system, and the housing market is not yet feeling any material relief from the monetary policy pivot.

Estate agents report that the August period — typically a season of heightened diaspora activity as Jamaicans living abroad return for the summer — produced a steady stream of property enquiries on the north coast and in suburban Kingston. However, enquiry-to-transaction conversion rates remain low. Buyers with diaspora connections are often better positioned to access hard-currency savings for deposits, but many are deterred by the overall affordability arithmetic when local financing is required to complete a purchase.

Government Policy

The government’s housing narrative this month has centred on defending the IMF programme framework as the mechanism through which long-term housing market improvement will be achieved. Ministers have pointed to the declining inflation trajectory and the BOJ’s rate easing as evidence that the adjustment is working, even as critics — led by the JLP opposition — argue that the near-term costs to housing delivery are being understated.

The NHT Consolidated Fund transfer remains the central point of political contention. The opposition has escalated its rhetoric through the August period, arguing that the transfer is depriving the Trust of the capital it needs to build the housing solutions that contributors have been promised. The government has reiterated that the transfer is a legal obligation under the amended NHT Act and a condition of the IMF programme, and that reversing it would jeopardise Jamaica’s fiscal compact.

PM Simpson Miller has been at pains to emphasise that the administration has not abandoned its social housing commitments. The Housing Agency of Jamaica’s programmes — including titling, serviced lots and social rental housing — are presented as evidence of continued government engagement with the housing needs of Jamaica’s most vulnerable communities, even within a constrained fiscal environment.

Construction Sector

The construction sector in August produced mixed signals. The private residential segment recorded a slight improvement in enquiries from the previous month, but industry observers caution against reading too much into this. Seasonal patterns partly explain the uptick — the post-summer period typically sees developers and buyers re-engage after the relative quietude of August. Formal construction starts remain subdued.

In the commercial segment, Kingston’s office and retail development pipeline has lengthened as developers await evidence of sustained economic recovery. Several projects that had been in advanced planning stages have been pushed to 2014 at the earliest. The infrastructure for accommodating growth is present in some parishes; the demand to trigger development is not yet there.

Major Developments

The National Housing Trust has opened intake processes for a number of developments in St Catherine, consistent with the Trust’s strategy of focusing scheme delivery in the peri-urban corridor south and west of Kingston where land costs are more manageable and contributor demand is concentrated. The intake processes are expected to attract multiples of the available housing solutions, illustrating the depth of unmet demand among qualified NHT contributors.

The HAJ has reported continued progress on the LAMP titling programme. The formalisation of land tenure in communities where residents have occupied land for generations without title is a slow but structurally important process, with downstream benefits for housing credit access that will extend well beyond the current economic cycle.

Infrastructure

The government’s capital works programme, significantly curtailed under the EFF’s fiscal adjustment requirements, is affecting the pace of infrastructure provision in new residential growth areas. The tension between the IMF programme’s primary surplus targets — which require reduced capital expenditure — and the infrastructure investment needed to unlock new residential land for development is a structural dilemma that housing sector planners are acutely aware of but largely powerless to resolve in the current fiscal environment.

Investment Climate

The investment climate in Jamaica’s property sector continues to be shaped by two very different narratives. The upper end of the market — luxury villas on the north coast, gated communities in St Andrew and St James — continues to attract interest from high-net-worth buyers, including returning diaspora professionals and foreign nationals associated with the tourism industry. This segment has an entirely different demand driver from the mass market and is largely insulated from the affordability pressures that define the NHT segment.

At the mass market level, investment interest is constrained by the fundamental affordability gap. Without either lower commercial rates or higher NHT loan limits, the market for newly-built homes in the J$6–12 million range remains largely inaccessible to the majority of employed Jamaicans who do not qualify for NHT scheme units.

Diaspora and Remittance Activity

The end of the North American and UK summer travel season is now bringing a return of diaspora visitors to normal patterns. Remittance inflows remain consistent with annual trends. A number of diaspora-connected buyers who viewed properties during summer visits are now in the process of evaluating whether financing arrangements are viable for formalising purchases before year-end. The north coast continues to dominate diaspora property interest, with retirement and vacation property the dominant motivations.

Affordability

The BOJ’s rate easing, while welcome, has not yet translated into any improvement in the commercial mortgage rate environment. The gap between NHT rates (0–6 per cent) and commercial rates (11–14 per cent) remains at its widest in recent memory. For Jamaican households that do not qualify for NHT financing — whether because they are not NHT contributors, have not accumulated sufficient contributions, or are purchasing properties that do not qualify under NHT guidelines — the commercial market remains deeply challenging.

Regional Context

The Caribbean housing market as a whole is experiencing the consequences of a decade of fiscal adjustment and external shocks. Jamaica’s situation is in some respects more acute than its neighbours due to the scale of its debt burden and the conditionality attached to the EFF, but the broader challenge of matching housing supply to demand at accessible price points is shared across the region. The Caribbean Development Bank has flagged housing as a priority area for concessional lending, though the disbursement timelines for such facilities do little to alleviate near-term supply gaps.

Looking Ahead

The second IMF quarterly review, expected in the coming weeks, will be closely watched. Continuation of clean programme performance will reinforce BOJ’s rate-easing trajectory and help maintain the stable exchange rate environment that underpins investor confidence. For the housing sector, the most anticipated development is any signal from the commercial banking sector that declining BOJ rates are beginning to influence mortgage pricing. The window between now and year-end is too short for transformative change, but the direction of travel — if the programme holds — points toward gradually improving conditions in 2014.