Fragile Hope in the New Year: Jamaica’s Housing Market Enters 2014 Under the Shadow of the IMF

Jamaica Homes Housing Affordability & Cost of Living Review — January 2014

• Jamaica enters 2014 eight months into the IMF Extended Fund Facility, having passed the first two quarterly reviews with the programme broadly on track
• The NDX debt restructuring, completed February 2013, reduced the government’s domestic interest bill but left the financial system adjusting to a new yield environment
• Mortgage rates from commercial banks remain in the high double digits, keeping formal homeownership beyond reach for most Jamaican families
• NHT disbursements provide the primary lifeline for working-class buyers, though the pool of eligible contributors has contracted as unemployment rises
• The Jamaican dollar has depreciated meaningfully against the US dollar through 2013, raising import costs including construction materials
• Consumer confidence remains subdued; household formation is occurring in the informal housing sector as formal market entry barriers remain prohibitive

There is a particular quality to hope in an austerity year. It is not the confident, expansive optimism of a boom, nor the crushed resignation of complete despair. It is cautious, contingent, aware of what could go wrong but unwilling to entirely abandon the possibility that things may, eventually, go right. Jamaica’s housing market enters January 2014 in exactly that mood. The IMF programme signed in May 2013 has survived its first eight months. Two quarterly reviews have been passed. The fiscal adjustment is proceeding. Something, at least, is being done. But the adjustment’s costs are immediate, palpable and borne by real Jamaican families — and its benefits, while real, remain distant enough that they cannot yet be felt in the choices that buyers, renters and developers make every day.

That is the housing market’s situation as the new year opens. Not a market in free fall, but not a market recovering either. A market suspended between a painful present and an uncertain future, sustained by the institutional infrastructure of the NHT and the determination of Jamaican households who have always found ways to put roofs over their heads regardless of what the formal market provides.

Exchange Rate Pressure and the Cost of Building

One of the less-discussed consequences of Jamaica’s fiscal adjustment has been the behaviour of the exchange rate. The Jamaican dollar has depreciated significantly against the US dollar through 2013. This depreciation is, in one sense, a feature of the adjustment programme: a more competitive exchange rate should, over time, support exports and the tourism sector that is central to Jamaica’s foreign exchange earnings. But for the housing market, exchange rate depreciation has an immediate and uncomfortable consequence: it raises the Jamaican dollar cost of construction materials whose prices are denominated in or linked to the US dollar.

Cement, steel, roofing materials, electrical and plumbing fittings, fixtures — all of these have a significant import component in Jamaica, where domestic manufacturing capacity is limited. When the Jamaican dollar falls, the landed cost in local currency of these inputs rises, even if global commodity prices remain unchanged. For a developer building affordable housing at a price point determined by what NHT-eligible buyers can borrow, a materials cost increase cannot simply be passed through to buyers. The result is a squeeze on development viability that discourages new affordable housing construction at precisely the moment when the deficit of such housing is most acute.

The Unemployment Trap

The Jamaica Labour Force Survey has documented the deterioration in employment conditions through 2012 and 2013. Unemployment has risen toward fifteen percent of the labour force. Youth unemployment is substantially higher. The informal economy has absorbed some of the displaced workers but at lower income levels and without the payroll contribution records that formal employment generates. This matters for housing in two ways. First, unemployment and income compression directly reduce the capacity of households to service mortgage debt, making lenders more cautious about credit extension. Second, NHT eligibility depends on contribution history — workers who have moved to informal employment lose their contribution momentum and their position in the NHT’s priority queue.

The interaction between the labour market and the housing market is one of the programme’s most concerning dynamics. Fiscal adjustment reduces public sector employment and compresses wages across the economy; this reduces housing demand capacity; this reduces construction activity; this further reduces employment — a reinforcing loop that operates in the opposite direction of the recovery that the programme is designed to deliver. The loop is not infinite; it is checked by the non-fiscal elements of the economy, including tourism, agriculture, remittances and the private sector activities that continue independently of government fiscal choices. But its existence is a reason to expect housing market recovery to lag the macro improvement that the programme eventually produces.

Remittances: The Quiet Stabiliser

Diaspora remittances have performed well through Jamaica’s crisis years. Flows to Jamaica from the United States, the United Kingdom and Canada have remained robust even as the domestic economy contracted. For housing specifically, remittances serve a function that the formal financial system cannot: they provide the cash that informally employed family members use to build incrementally, without mortgage debt, one room at a time, on family land whose tenure is often informal but whose occupation is secure in the community context. This is not the ideal model of housing delivery — it produces structures that are often technically non-compliant, underinsured and ineligible for formal resale — but it is the model that delivers shelter to hundreds of thousands of Jamaican families for whom the formal market is simply inaccessible.

The diaspora’s contribution to Jamaica’s housing stock deserves recognition in any policy discussion that is serious about the island’s housing deficit. Any effort to bridge the formal and informal sectors — through land titling programmes, simplified planning approval, incremental building standards that recognise what already exists — will need to work with and through the diaspora networks that have always been among Jamaica’s most effective housing finance institutions.

What This Means

For first-time buyers, January 2014 is not a moment to panic, but it is a moment to be realistic. The commercial mortgage market is not offering rates that make transactions easy. NHT availability is the primary access route, and maximising contribution records and NHT credit scores should be a priority for any buyer planning a purchase over the next two to three years. The market will improve — but the timing of that improvement depends on the IMF programme’s success and the credit market’s eventual response to Jamaica’s improving fiscal position.

For investors and landlords, the rental market is the strongest segment of 2014’s housing economy. With homeownership rates under pressure and household formation continuing, demand for quality rental accommodation in Kingston, Portmore and the major resort corridors remains firm. Yield expectations from residential rentals, in a low-growth, high-inflation environment, are attractive relative to the alternatives available to small investors.

The Outlook: Three Years Until the Turn

The IMF Extended Fund Facility runs until 2017. The programme’s design assumes that three years of fiscal adjustment will bring Jamaica’s debt ratio to a level — approximately 120 percent of GDP by fiscal 2016 — at which investor confidence, credit conditions and economic growth can begin to reinforce each other in a virtuous rather than vicious cycle. The housing market’s response to that turn, when it comes, will be shaped by the investment that was not made during the adjustment years: in construction capacity, in developer confidence, in the supply pipeline of affordable units. The gap between what the housing market has delivered during the crisis and what a recovering economy will demand creates the conditions for a significant catch-up cycle. January 2014’s fragile hope may, in retrospect, mark the trough from which that cycle eventually rises.

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

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