Sixteen Months of Hard Medicine: Jamaica’s Housing Market One Year Into the IMF Programme

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

• Jamaica’s IMF Extended Fund Facility is now sixteen months old; five of sixteen quarterly reviews have been passed without programme suspension
• The fiscal adjustment is real and painful: wages compressed, capital spending cut, tax burden shifted toward consumption in ways that affect housing affordability
• Ebola’s outbreak in West Africa is dominating international headlines; Caribbean tourism boards are managing anxious traveller enquiries about regional health risks
• Commercial mortgage rates remain at levels that price most formal sector workers out of homeownership without NHT assistance
• NHT’s contributor base shows resilience despite high unemployment; the Trust continues to lend within its established programme parameters
• Construction activity remains subdued as both private developers and public agencies operate in a capital-constrained environment

October 2014 marks sixteen months since Jamaica signed its Extended Fund Facility with the International Monetary Fund. The programme, agreed in May 2013 after the National Debt Exchange cleared the ground for an agreement that Jamaica’s debt levels would otherwise have made impossible, is now approaching its second of four years. Five consecutive quarterly reviews have been passed. The fiscal targets — the primary surplus path, the debt reduction trajectory, the inflation band — are being met. By the narrow measure of programme compliance, Jamaica is succeeding. By the broader measure of what economic adjustment is supposed to eventually produce for ordinary citizens, the verdict is more complicated.

Jamaica’s housing market in October 2014 is a study in sustained stress. The adjustment programme’s fiscal requirements — the compression of government spending, the maintenance of primary surpluses, the reduction in public sector wages in real terms — have depressed the household incomes of the public sector workers who make up a significant portion of the island’s middle class and its most reliable mortgage-servicing demographic. Commercial mortgage rates remain at levels that price formal homeownership beyond the reach of the majority of the formally employed. The NHT, the island’s most important affordable housing institution, continues to lend within its established parameters but cannot substitute for the broader economic conditions that affordable housing in a well-functioning market requires. And the housing deficit — the structural gap between supply and need that predates the IMF programme — has widened through the adjustment period rather than narrowed.

The West Africa Ebola Crisis: A Caribbean Anxiety

The international health emergency that is dominating global news in October 2014 is the Ebola outbreak in West Africa, which has killed several thousand people in Guinea, Liberia and Sierra Leone and prompted a global response that includes travel restrictions, quarantine procedures and significant international media attention. The outbreak has no direct connection to Jamaica; the island has reported no cases and has no significant population exposure to the affected regions. But its relevance to Jamaica’s housing market runs through tourism — the sector that most directly animates the island’s resort-community property markets and that has proven repeatedly sensitive to international health anxiety.

Caribbean tourism boards, including Jamaica’s, have issued reassurances about the region’s geographic and epidemiological distance from the affected West African countries. These reassurances are factually sound: the Caribbean is several thousand miles from the outbreak zone and has no meaningful tourist traffic from the affected countries. But the Ebola coverage has introduced a diffuse anxiety into the global travel market that Caribbean tourism operators are monitoring carefully. Cancellation rates have not spiked materially; the main risk is in the forward bookings market, where travellers uncertain about international health conditions may simply defer Caribbean travel decisions. For Jamaica’s resort property market, the scenario to watch is one in which the Ebola anxiety persists into the spring 2015 booking season.

The Cost of Compliance

The IMF programme’s fiscal requirements have been met through a combination of revenue measures and spending compression. On the revenue side, the National Fiscal Responsibility Law and the series of tax packages that preceded the programme shifted the tax burden toward consumption taxes — the General Consumption Tax, increased energy levies, and various fees and charges — that affect lower-income households disproportionately. On the spending side, public sector wages have been compressed in real terms, capital spending has been curtailed, and social transfer programmes have been constrained. The cumulative effect on the purchasing power of Jamaican households is negative and measurable.

For housing affordability specifically, the combination of compressed wages, elevated consumption taxes and high mortgage rates creates a triple constraint that no single policy instrument can resolve. The NHT’s role in this environment is critical: it is the only formal housing finance institution whose rates are subsidised below the market level, and it is the only housing programme that has maintained its function through the full compression of the adjustment period. But the NHT cannot serve households that have been pushed below the formal contribution threshold by job loss or income reduction, and it cannot bridge the gap between its loan limits and the cost of formally constructed units in accessible urban locations.

Signs of Life in the Private Market

It would be misleading to characterise Jamaica’s housing market in October 2014 as entirely inert. There is activity — it is concentrated in specific segments and is supported by specific income bases, but it is real. Resort-adjacent property in the north shore parishes is seeing sustained interest from diaspora buyers and international investors, supported by tourism’s relative resilience through the adjustment period. The Kingston upper-income apartment segment has seen several projects launch or advance, serving the professional class whose employment and income have been less directly affected by the adjustment’s fiscal compression. And the NHT’s ongoing scheme provision — however inadequate relative to overall demand — creates a stream of property transactions in the affordable segment that keeps the market from being entirely frozen.

What This Means

For buyers, the adjustment period’s continued progression toward its conclusion is the most important macro development to monitor. The programme’s structure — four years of quarterly reviews — gives a rough timeline for when the macro conditions should begin to improve meaningfully for the housing market. Buyers who are in the process of accumulating the eligibility — contribution records, deposit savings — that formal homeownership requires are making the right use of the adjustment period. Buyers who are waiting for rates to fall before starting that accumulation process are making a strategic error.

For developers, the current environment is not hospitable to large-scale affordable project launches, but it is not hostile to the planning and land acquisition that would position a project to launch into an improving market in 2016 or 2017. Developers with the financial resilience to take a medium-term horizon should be thinking about the demand wave that the programme’s eventual conclusion will release.

The Outlook: The Second Half of the Programme

Jamaica’s IMF programme is at its halfway point, with eight of sixteen quarterly reviews remaining. The second half of the programme should, if compliance is maintained, bring the earliest conditions for genuine housing market improvement: declining debt service ratios, improving sovereign credit, the beginnings of monetary easing, and the recovery in household confidence and incomes that fiscal stabilisation eventually enables. The housing market that greets the programme’s conclusion — now four to five years away — will be the beneficiary of the discipline that the current period is building, however painful that discipline feels in October 2014. That is the promise of fiscal adjustment. Jamaica is still in the phase of absorbing the cost. The dividend is ahead.

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

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