Jamaica Homes Housing Affordability & Cost of Living Review — January 2015
- Global crude oil prices collapsed by more than fifty percent in the second half of 2014, from above USD$100 to below USD$60 per barrel
- Jamaica, as a net oil importer, stands to benefit significantly from the price crash through lower energy costs, reduced inflation and eventual rate relief
- The IMF Extended Fund Facility completed its sixth quarterly review in late 2014, maintaining Jamaica’s unbroken compliance record
- Housing demand remains suppressed by elevated mortgage rates, high unemployment and the cautious household psychology of a second year of adjustment
- NHT continues its steady role as the primary affordable housing finance institution; contributor base stable as employment begins slow improvement
- The year begins with more reasons for cautious optimism than 2014 offered, though structural housing affordability remains a deep challenge
Jamaica begins 2015 with a piece of unexpected economic fortune: the dramatic collapse of global oil prices in the second half of 2014. From over USD$100 per barrel in June, crude fell through the year’s final months to below USD$60 by December — a decline of over forty percent in six months that has transformed the near-term economic outlook for oil-importing economies in ways that the most pessimistic forecasters of 2014 did not anticipate. For Jamaica, which imports substantially all of its petroleum and runs its power sector primarily on fuel-based generation, cheaper oil is an unambiguous economic benefit. The scale of that benefit, and the timeline over which it reaches Jamaican households, is the most consequential economic story of the opening weeks of 2015.
It is important, at the start of this analysis, to name the context in which this good news arrives. Jamaica closed 2014 in a second year of IMF programme adjustment, with unemployment still elevated, household incomes in real terms still below their pre-crisis peaks, mortgage rates still at levels that price formal homeownership beyond the reach of the majority of the working population, and a housing deficit that has deepened throughout the adjustment period. The oil crash does not resolve any of these underlying challenges. It improves the conditions in which they must be resolved. That is meaningful, but it is not transformative on its own.
Oil’s Fall Through the Economic System
The pathway from international oil prices to Jamaican household budgets and, ultimately, to mortgage market conditions is multi-step and time-lagged. The first beneficiary is the government, whose energy import bill falls as oil prices decline, easing the pressure on the fiscal accounts that the IMF programme requires to be balanced within tight primary surplus targets. A lower energy import bill means less pressure on the current account, which means less pressure on the Jamaican dollar, which means less monetary tightening to defend the exchange rate. Each of these effects — playing out over months, not days — creates marginally more favourable conditions for the mortgage market.
The consumer-facing impact comes through electricity tariffs, petrol prices and the cost of transport. Jamaica’s electricity sector, which has historically been among the most expensive in the Caribbean due to its petroleum-generation dependency, should see tariff reductions as fuel costs fall. The Office of the Prime Minister and the Ministry of Finance have been monitoring the pass-through of oil savings to consumer prices. For households spending a significant share of their income on power — common in Jamaica’s urban poor communities — lower electricity bills directly improve the housing affordability equation.
The IMF Programme at Eighteen Months
Jamaica’s IMF Extended Fund Facility marked its sixth consecutive quarterly review passed in late 2014. The programme’s eighteen-month track record is, by the standards of IMF programme compliance globally, exceptional. Jamaica has not missed a target. It has not sought renegotiation. It has not deviated from the primary surplus path or the debt reduction trajectory. The international financial community has noted this achievement; Jamaica’s sovereign bond spreads have tightened, its credit rating trajectory has improved, and the multilateral institutions have held the programme up as evidence of what small state adjustment can achieve with sustained political commitment.
For the housing market, this compliance record has an indirect but real value. The credibility that programme adherence has built is the credibility that eventually attracts the investment, both domestic and international, that housing market improvement depends on. Investors and developers will not commit to the multi-year horizons that housing projects require in a macro environment they do not trust. Jamaica’s compliance has been building that trust, slowly and at cost. The cost has been absorbed by Jamaican households in the form of constrained incomes and reduced public services. The trust is beginning to materialise in improved market conditions. The sequence is correct; the duration has been painful.
The Housing Market at the Start of 2015
Reviewing the housing market at the start of 2015 requires acknowledging both the genuine improvement in some indicators and the continued severity of the structural challenge. The improvements are real: the macro trajectory is better, the inflation outlook is better, the institutional framework (NHT, commercial banks, the land registry) is functioning. The severity is also real: commercial mortgage rates remain at levels that price out the majority of formal sector workers, the supply deficit has not narrowed, and the informal housing sector continues to grow as formal alternatives remain inaccessible to the majority.
The NHT enters 2015 in a financially sound position, with its contribution base stable and its mortgage programme functioning within established parameters. The Trust is the most effective housing affordability mechanism Jamaica has, and it is functioning. But it is one institution serving the need of hundreds of thousands of families, and its capacity is finite. The broader market — the commercial banks, the private developers, the land registration system — is improving incrementally from a very constrained base.
What This Means
For buyers, January 2015 is a moment of modest but genuine optimism relative to the preceding two years. The oil price fall has improved the near-term inflation outlook in ways that should eventually translate to better mortgage conditions. Buyers who have been maintaining NHT contributions through the adjustment period are approaching eligibility milestones; the start of the year is a good moment to verify contribution records and assess mortgage eligibility status.
For investors and developers, 2015 presents the earliest inflection point in the adjustment cycle at which a medium-term investment thesis can be constructed. The programme’s trajectory suggests improving conditions from 2016 onward; projects launched in 2015 that complete in 2017 or 2018 may be positioned to benefit from the demand recovery that improving conditions will release.
The Outlook: The Long Road Is Getting Shorter
Jamaica’s housing market began 2014 in a condition of severe constraint. It begins 2015 in a condition of marginally less severe constraint, with the oil dividend providing genuine tailwind and the programme’s cumulative progress beginning to appear in the macro statistics. The road to a genuinely affordable, adequately supplied housing market is still long. But the distance remaining is shorter than it was at this time last year, and the conditions under which the remaining journey must be made are marginally better. For a housing market that has endured two full years of adjustment, marginal improvement is not nothing. It is, in fact, exactly what sustained, difficult reform eventually produces. And it is the foundation on which the years ahead must build.
This review is produced for informational and journalistic purposes only and does not constitute financial, legal or investment advice.
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