The Price of Rescue: Jamaica’s Housing Market One Year On From the IMF Deal

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

• Jamaica’s IMF Extended Fund Facility, signed one year ago in May 2013, has achieved its first programme targets but household living standards remain severely constrained
• The NDX debt restructuring of February 2013 reduced Jamaica’s interest bill but compressed the savings available for investment, including housing
• Commercial mortgage rates remain high; the Bank of Jamaica’s monetary policy is focused on exchange rate stability and inflation control, not credit easing
• NHT loan volumes hold steady as the Trust’s contribution-funded model insulates it from the worst of the fiscal compression
• The construction sector operates at significantly below its pre-crisis capacity as credit conditions and developer confidence remain depressed
• Informal housing settlements continue to grow as the gap between affordable formal supply and working-class demand widens through the adjustment years

A year ago, Jamaica was in crisis. The country’s public debt stood at approximately 145 percent of GDP, among the highest ratios in the world. Investors had lost confidence in the sustainability of the debt trajectory. The government was unable to borrow at rates that would not compound the problem it was trying to solve. The National Debt Exchange — a quasi-voluntary restructuring of domestic government debt that reduced interest rates and extended maturities across the portfolio — had been completed in February 2013, clearing the immediate refinancing pressure while adding to the contractual obligations that the government owed existing creditors. And on May 1, 2013, Jamaica signed a four-year Extended Fund Facility with the IMF: formal acknowledgment that the country’s finances required external discipline to stabilise.

Twelve months later, the rescue is underway. The first three quarterly reviews of the programme have been passed. The primary surplus is running at the target level. The debt ratio has begun to decline from its peak. Inflation, while not fully subdued, is within the programme’s target range. The exchange rate has been broadly stable. The international financial community has responded to Jamaica’s programme compliance with marginally improved sentiment on the island’s sovereign creditworthiness. These are real achievements, earned through real sacrifice. The sacrifice has been shouldered primarily by Jamaican households whose wages have been compressed, whose public services have been reduced, and whose access to the formal housing market has become, if anything, more rather than less constrained in the programme’s first year.

The NDX and Its Housing Market Legacy

The National Debt Exchange of February 2013 deserves examination in any housing market review of this period, because its effects on the financial system have direct implications for mortgage market conditions. The NDX reduced the interest rates that the government pays on its domestic debt, compressing the yields that local financial institutions receive on their government securities portfolios. For commercial banks and other financial institutions that hold large government bond portfolios, the NDX reduced income that had previously subsidised their capacity to offer competitive loan rates. The paradoxical result was that the NDX — which reduced the government’s interest burden — may have contributed to the elevation of commercial mortgage rates that persisted through 2013 and into 2014.

The longer-term trajectory is more positive. As the debt ratio falls and Jamaica’s credit improves, the sovereign risk premium embedded in all Jamaican borrowing costs should gradually compress. Lower sovereign costs will flow through to lower commercial lending rates, including mortgage rates. This is the mechanism through which fiscal adjustment eventually improves housing affordability — but the mechanism operates over years, not months, and the housing market in April 2014 has not yet seen this benefit materialise in ways that buyers can feel.

The NHT’s Continued Function Under Austerity

The National Housing Trust’s design — funded by mandatory payroll contributions from employees and employers, operating independently from government fiscal allocations — has proven its value through Jamaica’s adjustment period. Because it does not depend on budget appropriations, the NHT has been able to maintain its mortgage disbursement function through the full compression of the fiscal adjustment. Its contribution income has declined somewhat as employment falls and wages stagnate, but the Trust’s accumulated reserves have provided the financial cushion that allows it to continue lending at subsidised rates to qualifying contributors.

This institutional resilience is not an accident; it is the design intent of the NHT’s founders, who understood that a housing finance institution funded from general taxation would be vulnerable to exactly the kind of fiscal pressure that Jamaica’s adjustment requires. The NHT is Jamaica’s most durable housing policy institution, and the evidence of 2013 and 2014 is that it is durable precisely in the moments when durability matters most — when the broader economic environment is most hostile to housing market function.

Construction: Operating at a Fraction of Capacity

Jamaica’s construction sector, which had been among the most significant employers of working-class labour before the crisis, has contracted sharply through the adjustment period. The combination of compressed government capital spending, tightened commercial credit for development finance, and depressed developer confidence in housing demand has reduced construction activity to levels well below the sector’s productive capacity. This supply constraint is not resolved by improved demand conditions alone; construction capacity — trained labour, operating companies, active supply chains — degrades during periods of extended low activity and takes time to rebuild when conditions improve. The longer the construction sector remains constrained, the longer the supply pipeline gap that Jamaica’s housing deficit requires to be filled will take to address.

What This Means

For buyers, the one-year programme anniversary is a marker on what will be a long road. The programme has three more years to run. The housing affordability improvement that the programme’s fiscal work eventually enables is real but delayed. Buyers who are within reach of NHT eligibility and who have access to an eligible unit should not let the macro uncertainty of the adjustment period indefinitely defer a well-founded purchase decision. The structural argument for homeownership — building equity, escaping rent, accumulating an asset — does not diminish because the macro environment is difficult.

For diaspora buyers, the combination of motivated sellers, depressed competition from domestic buyers and a Jamaican dollar that has weakened against major currencies during the crisis has created value opportunities that hard currency buyers should evaluate. Property titles and legal advice quality remain critical considerations in any Jamaica property transaction.

The Outlook: Building Toward the Dividend

Jamaica’s housing market in April 2014 is at the bottom of what will, in retrospect, prove to be a recovery cycle. The IMF programme has established the macro foundation. The NDX has cleared the most acute debt pressure. The NHT has maintained its function. Three more years of adjustment will deliver the rate environment, the fiscal space and the investor confidence that the housing market’s recovery requires. The dividend of the pain that Jamaica is absorbing is real. For the households living through the adjustment, it is also distant. The housing market’s recovery will come. It will not be recognisable in this April’s data. It will be recognisable in 2017 and beyond, and it will be traceable, in part, to the institutional discipline that Jamaica demonstrated in its willingness to sign and adhere to an agreement whose terms were never comfortable.

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

Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomesnews Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com