Jamaica Real Estate Roundup — Q1 2014: The Austerity Winter, the Diaspora Season, and a Market in Adjustment

• First winter season under IMF EFF disciplines; market adapting to tight conditions.
• Diaspora January most concentrated demand period; exchange rate dynamics positive.
• BOJ rate environment restrictive; commercial mortgage costs elevated.
• Seller price expectations adjusting; buyer leverage at cycle high.
• Tourism winter season modest; occupancy improving but below sector targets.

The first quarter of 2014 was the first complete winter season of the IMF Extended Fund Facility programme’s operation, and it found Jamaica’s property market adapting — with the gradual, uneven adjustment that significant structural shifts produce — to the tightest financing and income conditions the sector had experienced in the current decade. The programme’s fiscal disciplines, which had been in formal operation since the May 2013 agreement’s signing, were by Q1 2014 embedded in the economic framework with sufficient depth that their property market consequences were fully visible: a buyer pool whose qualifying capacity was constrained by the combination of elevated mortgage rates and programme-compressed incomes, a seller community that was learning the difference between the prices their properties were worth in a more active market and the prices the current market’s buyers were willing and able to pay, and a transaction pace that reflected the reduced urgency that fewer buyers and lower buyer competition inevitably produce.

The Bank of Jamaica’s monetary policy environment through Q1 2014 remained elevated, with the overnight policy rate at levels that the institution’s Monetary Policy Committee was maintaining against an inflation picture that was, by Q1 2014, beginning to suggest that the conditions for easing were approaching but had not yet fully materialised. The commercial banks’ mortgage rates — priced above the policy rate by the spread requirements of commercial risk management — were making residential mortgage financing expensive by the standards of what the post-easing cycle market would offer, and the qualifying mathematics for the middle-income household seeking a residential mortgage were more demanding than they had been at any point in the preceding several years.

The Diaspora January Season

The Q1 2014 property market’s most active demand component was, as in every preceding year, the January window of the diaspora return season. The Jamaicans of the North American and British diaspora who had extended their Christmas visits into the new year, or who had specifically timed a January visit to conduct the property market research and agent consultations that a serious purchase decision required, brought to Q1 2014’s residential market the combination of harder-currency savings, investment intent, and emotional connection to the island that makes this cohort disproportionately significant in the property market’s seasonal arithmetic.

The exchange rate dynamics of early 2014 were working in the diaspora buyer’s favour with greater force than in any comparable Q1 period in recent memory. The Jamaican dollar’s managed depreciation against the US dollar and British pound had been compounding over the preceding several years, and the purchasing power advantage that an offshore Jamaican with savings in hard currency enjoyed in the local property market was, by Q1 2014, sufficiently material to constitute a genuine investment argument independent of the emotional pull of the home connection. Agents who served the diaspora segment reported that their Q1 2014 enquiry quality was above the comparable 2013 period, with buyers who had been watching the market from offshore concluding that the combination of the constrained conditions’ price-moderation effect and the exchange rate’s purchasing power improvement was producing the most favourable entry point they had seen in years.

Seller Adjustment: The Price Expectation Gap

The most analytically interesting dynamic of Q1 2014’s residential market was the negotiation that was underway, property by property, between the sellers’ price expectations and the buyers’ qualifying capacity and willingness to pay. The sellers who had entered the market with asking prices calibrated to the more active conditions of 2011 and 2012 were discovering, through the extended time-on-market and the absence of the competing offers that a more active buyer pool would have produced, that their price expectations required adjustment. The adjustment was painful for sellers who had been relying on a property transaction to fund another purchase, retire debt, or access capital for other purposes, and the emotional resistance to accepting a lower price than the property was “worth” — the worth being measured against a market that no longer existed — was producing the standoffs and extended marketing periods that characterise a market in price expectation adjustment.

The buyers who were navigating this environment were benefiting from the extended time available for due diligence, the opportunity to inspect multiple properties without the pressure of immediate competing offer risk, and the negotiating leverage that a market with more sellers than buyers inevitably provided. The experienced buyer — the one who understood that the current conditions were a temporary state that the macro improvement would eventually reverse — was approaching the Q1 2014 market with the disciplined patience of a long-term investor buying at cycle trough rather than the urgency of a market participant afraid of missing a rising market.

Winter Tourism: The Season’s Reality

The winter tourism season’s Q1 2014 performance was improving relative to the preceding year’s comparable period but remained below the targets that the Jamaica Tourist Board and the major resort operators had set for the year. The Montego Bay resort corridor’s January to March occupancy rates were above Q1 2013’s levels, reflecting both the expanded airlift that new routes from secondary North American markets were providing and the improving digital marketing reach of the resort operators whose online presence had been progressively strengthened. But the improvement’s pace was below the more optimistic forecasts, and the revenue-per-room metrics reflected the competitive pricing that the occupancy shortfall required.

The NHT and Affordable Housing

The National Housing Trust’s Q1 2014 activity reflected both its mandate and the constraints the programme environment was placing on its ability to fulfil it. The Trust’s mortgage lending to qualifying contributors was continuing at the pace that the contributor base’s entitlement accumulation and the available housing supply allowed, but the resource constraints of the fiscal consolidation were limiting the construction programme volumes that the Trust’s development arm could advance. The housing deficit — the gap between the supply of affordable housing units and the qualifying demand for them — was, in Q1 2014, at a level that the Trust’s own documentation acknowledged as structurally significant. The programme’s fiscal disciplines were not the proximate cause of the deficit, which predated the EFF by many years, but they were not creating the conditions in which the deficit could be materially reduced.

Quarter Close: The Long View

The first quarter of 2014 closes with Jamaica’s property market in the adjusted conditions that the IMF programme’s disciplines have produced: lower transaction volumes, moderated price growth, elevated financing costs, and a buyer pool whose qualifying capacity the elevated rate environment has constrained. The quarter’s positive developments — the diaspora season’s solid activity, the IMF programme’s continued positive review track record, the tourism sector’s gradual recovery — are real but insufficient to alter the current market’s constrained character. The long view — the understanding that the programme’s disciplines are building the macro stability and the debt trajectory improvement that will eventually enable the rate easing and income recovery that the property market’s full recovery requires — remains the most important framework for understanding what the Q1 2014 market is, and what it is building toward.

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