A Year of Hard Choices: Jamaica’s First IMF Programme Anniversary and What It Means for Housing

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

• Jamaica’s IMF Extended Fund Facility marks its first year since signing in May 2013; three quarterly reviews passed, fiscal programme largely on track
• The adjustment has delivered macro stability but at significant social cost: wages compressed, public investment slashed, household purchasing power reduced
• Commercial mortgage rates remain in double digits, making formal homeownership inaccessible to the majority of Jamaican formal sector workers
• NHT mortgage activity holding steady; the Trust’s independent funding base insulates it from the worst of the fiscal adjustment’s effects on public programmes
• Construction sector operating at low capacity as both credit and government investment remain constrained
• Diaspora remittances continue to be the most important external income source for Jamaican households, supporting both residential consumption and property investment

Thirteen months have passed since Jamaica signed the Extended Fund Facility with the International Monetary Fund. The moment, on May 1, 2013, represented the formal beginning of what the government and the IMF both acknowledged would be a painful, sustained period of fiscal adjustment. One year on, the adjustment is painful and it is sustained. Whether it is producing the structural improvement that the pain is supposed to purchase is a question that the data are beginning to address, though the answer is not yet unambiguous.

Three quarterly reviews have been passed. The primary fiscal surplus — the measure of whether Jamaica is spending less than it earns before debt service — is running at the target level. The debt ratio, while still among the highest in the world relative to GDP, is on a declining trajectory that the programme’s fiscal discipline is sustaining. The exchange rate has been broadly stable. Inflation is within the target band. By the scoreboard of IMF programme metrics, Jamaica is on track. By the scoreboard of housing affordability — can more Jamaicans access formal homeownership than they could before the programme started? — the answer is, if anything, no. The housing market has not improved through the programme’s first year. In some respects, it has worsened.

What Fiscal Adjustment Does to Housing

The mechanism through which IMF-style fiscal adjustment affects housing is worth tracing carefully, because the effects are not always visible in the headline metrics that capture most policy attention. The most direct effect is through wages: the programme requires that public sector wages be held below inflation, which reduces the real income of the largest category of formally employed Jamaican workers — the teachers, nurses, civil servants and public sector professionals who constitute the primary client base of the NHT mortgage programme. A teacher earning less in real terms than she earned two years ago is a teacher less able to service a mortgage comfortably, regardless of what interest rates are doing.

The second effect is through public investment compression. The programme’s fiscal arithmetic leaves very little space for government capital spending. Public housing programmes — the housing subdivisions, the infrastructure investments that would open up land for residential development, the regularisation programmes that would bring informal tenure into the formal mortgage system — have all been constrained by the austerity requirements. The NHT, which is not funded from fiscal appropriations but from its own mandatory contribution stream, has been less directly affected. But the broader public investment environment that would normally support housing supply has been essentially switched off for the duration of the adjustment.

Rates That Lock Out the Middle Class

Commercial mortgage rates in Jamaica in July 2014 remain in double digits, reflecting the ongoing combination of high sovereign borrowing costs, elevated inflation expectations, and the risk premium that lenders attach to the Jamaican credit environment. A double-digit mortgage rate on a Jamaican dollar loan is, for a household earning the median formal sector income, a monthly payment that consumes a proportion of take-home pay that is simply not viable alongside the cost of food, transport, education, utilities and other basic expenditures. The NHT’s subsidised rate provides a better proposition — the Trust’s rates are well below the commercial level — but the NHT’s loan limits and the shortage of eligible units constrain the number of contributors who can actually use the programme.

The result is that formal homeownership in Jamaica in 2014 is, in practice, accessible to a relatively narrow stratum of the workforce: the upper income quartile of formal sector employment, the diaspora buyer using hard currency savings, and the NHT contributor lucky enough to have accumulated sufficient eligibility and to find an available unit within the Trust’s loan limits. For everyone below these categories, the housing pathway is informal: rental, family land, incremental self-build, or forms of tenure that provide shelter but not the asset accumulation and credit access that formal title enables.

The Diaspora Lifeline

The most consistent and durable source of housing investment in Jamaica — through adjustment and boom alike — is the diaspora remittance flow. Bank of Jamaica data consistently shows remittances as one of Jamaica’s largest foreign exchange income streams, running at approximately fifteen percent of GDP annually in recent years. A significant portion of this flow is directed toward housing: construction projects, mortgage co-payments, land purchases, and direct property acquisitions by Jamaicans living and earning in the United States, United Kingdom and Canada. The diaspora does not experience the adjustment’s wage compression in the same way that resident Jamaicans do; those earning in USD or sterling are, if anything, benefiting from the Jamaican dollar’s gradual depreciation, which makes Jamaica-priced property progressively cheaper in hard currency terms.

What This Means

For buyers in the formal sector, the programme’s first year has been difficult but not entirely without structure for homeownership planning. Buyers who are building NHT eligibility through consistent contribution are making investments whose value will be realised when market conditions improve. The programme has a finite duration — four years — and buyers with a four-to-five-year horizon should plan accordingly.

For diaspora buyers, the current adjustment period presents some of the best value in Jamaican property in recent memory. Motivated sellers, limited domestic competition and a depreciating Jamaican dollar combine to create purchasing conditions that hard currency buyers should evaluate carefully. Due diligence on title and property condition remains essential; the quality of legal advice on Jamaica property transactions is variable.

The Outlook: The Valley Is Long

Jamaica’s housing market is in a valley — a period of constrained conditions from which it will emerge, but not quickly. The programme has three more years of quarterly reviews. The fiscal adjustment’s most direct effects on household incomes will not begin to reverse until wages are allowed to grow again, which requires the macro conditions the programme is working toward. The supply-side constraints on affordable housing are structural and will persist beyond the programme’s conclusion. What the programme will eventually provide is the macro foundation — lower debt, lower rates, improved credit, improved investor confidence — on which a housing market recovery can be built. The valley is long. The climb out, when it comes, will be worth the journey.

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