In the Valley of Adjustment: Jamaica’s Housing Market Confronts Its Deepest Reckoning

Jamaica Homes Housing Affordability & Cost of Living Review — October 2013

• Jamaica is five months into the IMF Extended Fund Facility signed May 1, 2013, with the first quarterly review completed and the programme broadly on track
• The NDX debt restructuring of February 2013 removed the immediate refinancing threat but required domestic creditors to accept lower yields, reshaping the financial sector’s income profile
• The housing market is in the deepest phase of its adjustment cycle: construction activity depressed, mortgage credit tight, commercial rates prohibitive for most buyers
• NHT remains operational and disbursing, providing the only subsidised mortgage access available to formal-sector workers
• Rental demand is rising as the homeownership pathway closes for the working and middle class; informal settlements are expanding at the urban periphery
• The Jamaican dollar continues to depreciate against the US dollar, adding to imported inflation and raising construction material costs

The valley of an economic adjustment is a strange and disorienting place. The dangers that necessitated the descent are still fresh in memory — the debt crisis, the NDX, the months of negotiation with the IMF, the anxiety about whether the Fund would sign a programme or leave Jamaica to a disorderly unravelling. The recovery that the adjustment is supposed to deliver remains invisible, theoretical, promised by economists and programme architects who speak confidently about debt trajectories and primary surpluses but who are not the ones skipping meals, deferring medical care or watching their savings depreciate in real terms. Between the crisis and the recovery: this is where Jamaica’s housing market stands in October 2013.

Five months after the Extended Fund Facility was signed, the programme is meeting its targets. The first quarterly review has been completed. The primary fiscal surplus is running at the agreed level. Jamaica has demonstrated to the IMF and to financial markets that it is, for the moment, prepared to do what its programme commitments require. This is important and should not be dismissed. But programme compliance is not the same as economic recovery, and it is recovery, not compliance, that determines what happens in Jamaica’s housing market.

The NDX: Aftermath in the Financial Sector

The National Debt Exchange, completed eight months ago in February 2013, restructured approximately $860 billion in domestic government debt. Holders of government bonds — primarily commercial banks, insurance companies, pension funds and other financial institutions — accepted reduced coupon rates and extended maturities. The exchange was described as voluntary, and participation was high enough that it could plausibly claim that description. But the implicit coercive context — that the alternative to an orderly NDX was a disorderly default that would have been far worse for all creditors — was present throughout the process. Financial institutions participated because they had to, not because they wanted to.

The consequences for the mortgage market have been mixed. On one hand, the reduction in government bond yields created space for commercial banks to reduce their lending rate benchmarks. On the other hand, the compression of banks’ government securities income placed pressure on their cost-to-income ratios, making them more cautious about credit extension in an already uncertain economic environment. Commercial mortgage rates remain in the high double digits in October 2013. The gap between NHT rates — which for qualifying borrowers can be as low as two to six percent per annum depending on income level — and commercial rates represents perhaps the most significant price stratification in the Jamaican economy. It creates a housing system with two tiers, and a premium for formal sector employment that the adjustment years have made more rather than less important.

Construction: The Silence of Stalled Development

Drive through the residential development corridors of Kingston and St Andrew — the communities of Washington Gardens, Portmore, the upper St Andrew hills, the development schemes of St Catherine — and the quietness is visible before it can be measured. Sites that should be active are not. Projects that were announced in the years before the crisis have been indefinitely postponed. Developers who had acquisition plans in place are holding, waiting, hoping the credit environment improves before their carrying costs erode whatever margin they projected. The silence of stalled development is one of the characteristic features of Jamaica’s housing market in 2013, and it is a silence that the housing deficit — which the planning authorities estimate at tens of thousands of units — can ill afford.

The formal construction sector’s employment has contracted. Skilled building tradespeople — masons, carpenters, electricians, plumbers — who cannot find formal project employment have moved to informal contract work, doing extensions and repairs rather than new construction. This redistribution of skills has a cost: the organised capacity to deliver large-scale affordable housing schemes requires not just individual tradespeople but functioning construction companies with access to development finance, insurance capacity and project management. That organisational capacity is hard to rebuild once it has been allowed to dissolve.

The Rental Market: Absorbing the Overflow

If the homeownership market is the story of closure and contraction, the rental market is the story of absorbing the consequences. Every family that cannot access a mortgage — because they are informally employed, because their NHT contributions are insufficient, because commercial rates are simply unaffordable — becomes a rental market participant instead. In October 2013, a large and growing share of Jamaica’s household formation is occurring in the rental sector. The supply of quality formal rental accommodation is not expanding fast enough to meet this demand, and the result is rising rents, falling space per person, and a steady flow of households toward the informal settlement periphery of Kingston and the resort towns.

For landlords with quality properties in established locations — New Kingston, Liguanea, Half Way Tree, the resort communities of Montego Bay and Ocho Rios — the rental market in October 2013 is performing well. Yields are supported by demand exceeding supply. The challenge for the market is that the segment performing best is the upper rental tier, while the affordable rental segment — which the majority of displaced would-be buyers actually need — remains critically undersupplied.

What This Means

For buyers who have NHT access and a qualifying property in view, October 2013 is not a reason to abandon a transaction. The NHT’s subsidised rates represent a genuine gift that the adjustment has not taken away. Buyers who can close an NHT-financed transaction should do so. The waiting period may produce a modestly lower purchase price, but it will not produce a mortgage rate lower than what the NHT currently offers — and the opportunity cost of deferral, in continued rent payments and foregone equity accumulation, is real.

For the development industry, the period of adjustment, while painful, is also a period in which land can be acquired at more reasonable prices and relationships with NHT can be deepened for schemes that will be delivered when credit improves. Developers who use the down years to position rather than simply survive will be best placed when the cycle turns.

The Outlook: Enduring Toward the Recovery

The IMF programme has three and a half years remaining. The adjustment arc, if the programme is completed, delivers a Jamaica with substantially lower debt, improved credit standing, lower sovereign borrowing costs and — eventually — a lower commercial interest rate environment in which housing market function normalises. That outcome is achievable. It requires the government to sustain programme compliance through the remainder of the four-year period, through whatever political pressures and economic headwinds the coming years produce. It requires the NHT to maintain its financial health through a period of lower contribution income. It requires the financial sector to hold its institutional capacity intact through a period of compressed margins. None of these requirements is guaranteed. But none is impossible. In the valley of adjustment, Jamaica’s housing market endures — waiting for the climb that the programme promises to make possible.

This review is produced for informational and journalistic purposes only and does not constitute financial, legal or investment advice.

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