Jamaica Real Estate Roundup — Q4 2014: The Tightest Year Closes, and the Rate Easing Begins to Show

• IMF EFF programme first full year completing; targets being met.
• BOJ rate easing cycle begins; mortgage costs starting gradual descent.
• Christmas diaspora season most active demand window of 2014.
• Residential market at cyclical low; deferred demand accumulating.
• Strata apartment concept earliest commercial projects advancing in Kingston.

The fourth quarter of 2014 closed what most participants in Jamaica’s property market would recognise as the tightest year of the IMF Extended Fund Facility programme’s early implementation. The fiscal consolidation framework that the May 2013 agreement had imposed — the primary surplus requirements, the public sector wage restraint, the controlled public investment envelope, the revenue measures — had by Q4 2014 been in operation for eighteen months, and their combined effect on the household income growth and consumer confidence that property market demand required was visible in the year’s transaction data: volumes well below what the underlying demographic demand suggested the market should be generating, price appreciation constrained to levels that offered sellers little satisfaction, and a financing environment whose improvement the BOJ’s newly initiated easing cycle was promising but had not yet delivered in the quantum that would materially shift buyer behaviour.

The quarter’s most significant monetary policy development was the continuation and gradual gathering of pace of the Bank of Jamaica’s rate easing, which had begun in the preceding quarters as the inflation picture improved and the fiscal consolidation’s macro stability gains created the conditions that the BOJ’s Monetary Policy Committee needed to justify a progressive reduction in the overnight policy rate. The easing was proceeding cautiously — the MPC’s communications were careful to manage expectations about the pace of future reductions while providing sufficient forward guidance to allow mortgage market participants to begin planning around the expectation of improving financing conditions. The actual mortgage rate improvements that Q4 2014’s commercial banks were offering to qualified borrowers were modest compared to what the full cycle would eventually produce, but they were real, and they were the first genuine improvements in mortgage affordability that the market had seen since the early years of the decade.

The IMF Programme: First Full Year Assessment

The IMF Extended Fund Facility’s first full year of operation had, by the evidence of the Fund’s quarterly review assessments through 2014, been managed with the programme compliance discipline that the agreement required. The primary surplus targets were being met, the structural reform conditionality was being addressed, and the IMF’s review communications reflected an institution satisfied with Jamaica’s implementation performance even as its economists maintained their vigilance about the remaining risks to the consolidation trajectory. The positive external validation of the Fund’s assessments was maintaining the sovereign creditworthiness that the programme’s success was designed to generate, and the improving fiscal metrics were providing the foundation for the rate easing that the BOJ was beginning to deliver.

For the property market, the programme’s first full year had been a period of enforced patience. The buyers who understood that the IMF’s disciplines were the precondition for the rate easing and macro stability that would ultimately improve their purchasing conditions were, rationally, waiting. The developers who recognised that the demand compression of the programme years would be followed by a demand recovery that the improving conditions would release were, where they had the balance sheet strength to do so, using the constrained period to advance their project planning and permitting ahead of the anticipated recovery. The NHT was maintaining its mortgage programme and advancing what affordable housing units it could within the constrained resources that the programme disciplines allowed. The market was not static; it was patient.

The Christmas Diaspora Season

The Q4 2014 property market’s most active period was, as it had been in every preceding year, the December window of the diaspora Christmas season. The returning Jamaicans of the North American and British diaspora — whose December visits to the island represent the property market’s most concentrated annual demand event — brought with them the year’s accumulated savings, the investment intentions that the working months’ remittance discipline had deferred, and the emotional pull of the island that the Christmas visit reliably regenerates. For many in this cohort, the decision to buy in Jamaica was not primarily a financial calculation but an expression of identity and belonging that the improving economic narrative — the IMF programme’s progress, the improving fiscal metrics, the BOJ’s easing signals — was making more comfortable to act upon.

The exchange rate dynamics of Q4 2014 continued to favour the diaspora buyer. The Jamaican dollar’s managed depreciation against the major trading currencies had been progressively increasing the purchasing power of the offshore Jamaican’s US dollar and British pound savings in the local property market, and the widening of this gap since the mid-decade was making the investment case for Jamaican property more compelling for this cohort than it had been in years when the exchange rate was closer to purchasing power parity. Agents and developers who served the diaspora segment confirmed that December 2014’s activity was above December 2013’s level, and that the enquiry quality — the proportion of serious, purchase-ready buyers relative to browsers — was the best it had been in several years.

The Kingston Residential Market in Its Trough

The broader Kingston residential market’s Q4 2014 performance reflected a sector at or near the trough of the cycle that the IMF programme years had produced. Transaction volumes in the conventional detached and townhouse segments were below the levels that the demographic demand would ultimately express, reflecting the combination of income compression, elevated financing costs, and the buyer caution that the austerity environment had produced. The market was not in crisis — transactions were completing at prices that reflected fair value in the conditions that prevailed — but it was operating with the subdued urgency of a market in which both buyers and sellers understood that the current conditions were unlikely to be the conditions in which either party’s long-term interests were best expressed.

The upper end of the market — the premium detached property in the established Kingston and St Andrew residential communities — was holding value better than the middle market, reflecting both the limited supply of genuinely premium residential property and the demand from the business and professional class whose income trajectory was less directly compressed by the programme’s public sector disciplines. But even the premium segment was experiencing the extended time-on-market and the negotiating dynamics of a buyer’s market that the broader conditions had produced.

Strata Apartments: The Earliest Commercial Ventures

The strata apartment sector’s Q4 2014 position was one of genuine, if early-stage, commercial activity. The projects that had been the format’s earliest Jamaican pioneers — the developers who had recognised the market gap that the strata format could fill and had committed capital to testing the concept in the specific conditions of Kingston’s residential market — were advancing through their development programmes in the constrained conditions of the period. Pre-sales activity was modest but real, providing the validation that the concept’s commercial advocates needed and the track record data that later-stage developers were watching carefully.

Year Close: The Patient Bottom of the Cycle

The year 2014 closes with Jamaica’s property market at what the structural analysis of the conditions suggests is the bottom of the IMF programme cycle’s property market impact. The rate easing has begun. The programme’s compliance track record is building the macro stability that the recovery’s preconditions require. The diaspora’s purchasing power is improving with each year’s exchange rate movement. And the strata sector’s earliest projects are building the track record that the concept’s broader adoption will require. The market that enters 2015 is a market whose direction is beginning to change, even if the change is not yet visible in the headline data that the wider public uses to read the market’s health.

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