The Falling Price of Energy and the Stubborn Price of Homes: Jamaica’s Housing Market in the Oil Crash Era

Jamaica Homes Housing Affordability & Cost of Living Review — April 2015

• Global oil prices remain at near six-year lows following the crash that began in mid-2014, reducing Jamaica’s energy import costs and providing modest fiscal relief
• Lower fuel costs are beginning to filter through to reduced electricity prices and transport costs, incrementally improving household purchasing power
• IMF programme compliance is sustained into a second year; seven quarterly reviews passed, debt trajectory improving, primary surplus maintained
• Despite the energy dividend, commercial mortgage rates remain painfully high and the housing supply deficit continues to deepen
• NHT loan activity steady; the Trust remains the primary formal housing finance institution accessible to middle-income Jamaicans
• Informal housing continues to grow faster than formal supply, with squatter communities expanding in and around Jamaica’s major urban centres

There is good news in Jamaica in the spring of 2015, and it comes from an unexpected source: the collapse of global oil prices. Beginning in the second half of 2014, oil began a dramatic decline that has taken international crude prices from over USD$100 a barrel to below USD$50 — a fall of more than fifty percent in less than a year. For a small island economy that imports essentially all of its petroleum — that uses oil to generate the electricity that powers homes and businesses, to fuel the transport system on which the economy depends, and to service the petrochemical requirements of light manufacturing — cheaper oil is an unmixed economic blessing. The savings flow first to the government’s energy import bill, then to the fuel costs of the private sector, and eventually to the electricity bills and petrol costs of Jamaican households.

This is genuinely helpful for housing affordability, though in ways that are less direct and more gradual than a mortgage rate cut or a deposit subsidy would be. The mechanism is a chain: lower oil reduces inflation, lower inflation gives the Bank of Jamaica more monetary space, more monetary space eventually enables lower rates, lower rates reduce mortgage costs. Each link in this chain takes time — the oil price fell in 2014; the monetary easing it eventually enables may not arrive until 2016 or 2017 — and the chain can be interrupted by any number of external shocks. But the direction of travel that the oil crash has established is, for the first time in several years, pointed in the right direction for Jamaica’s housing market.

How Lower Oil Changes the Household Budget

For individual Jamaican households, the oil price decline is appearing in their lives through two primary channels. Electricity tariffs, which had risen substantially over the preceding years as petroleum-based generation costs were passed through to consumers, have declined as fuel costs fall. This is not a trivial saving: electricity in Jamaica is among the most expensive in the Caribbean, and the share of household income that lower-income families devote to power is significant. A meaningful reduction in the electricity bill directly improves the residual income available for mortgage payment or deposit accumulation.

Transport costs have also declined as gasoline and diesel prices fall from the peaks of 2013 and 2014. In a country where public transport is inadequate and many workers rely on route taxis or private vehicles for commuting, the cost of getting to work is a significant item in the household budget. Cheaper fuel reduces this cost. Combined with electricity savings, the net effect on household discretionary income is modest but real — a few thousand Jamaican dollars a month that can be redirected toward housing-related savings or mortgage serviceability.

Why Mortgages Are Still Out of Reach

The oil-driven household savings cannot, however, bridge the fundamental affordability gap that separates most Jamaican working families from formal homeownership. Commercial mortgage rates remain in double digits — high by international standards and very high relative to the income levels at which the majority of the formal workforce operates. The NHT’s subsidised rates offer a better proposition, but the Trust’s loan limits and the supply of eligible units constrain the number of contributors who can actually use the programme rather than merely contribute to it.

The fundamental affordability equation — what a household can borrow on a given income, what a formally built and titled unit costs in an accessible location, and the gap between the two — has not changed materially through the adjustment period. Oil’s fall has improved the numerator slightly and should, over time, improve the denominator by enabling lower rates. But the structural gap will persist until either construction costs fall (unlikely given global materials market pricing) or mortgage rates compress substantially (plausible over a medium-term horizon) or NHT limits are raised (a policy choice) or supply is delivered at genuinely affordable price points (the hardest nut of all to crack).

The IMF Programme at Two Years

Jamaica’s Extended Fund Facility with the IMF entered its second year in May 2014. At April 2015, seven of the programme’s sixteen planned quarterly reviews have been passed, with the eighth imminent. The track record is strong; Jamaica has achieved something that few IMF programme countries achieve — full compliance without programme suspension or renegotiation. The fiscal data reflect the adjustment: the primary surplus is running at or above target, the debt ratio is declining, inflation is within the target band. The programme is working in the narrow technical sense of delivering on its quantitative targets.

The social balance sheet is more complicated. Unemployment remains elevated. Public sector wages have been held below inflation. The public investment programme — including the affordable housing investment that the NHT cannot substitute for — has been severely compressed. Communities across Jamaica are experiencing the programme as a prolonged and difficult period of constrained living standards, sustained by the promise that the stability being achieved now will enable the growth and improvement that is not yet visible. That promise is not false; the fiscal stability that the programme is creating is the necessary foundation for the investment and growth that Jamaica needs. But the foundation is not the house.

What This Means

For buyers, the oil-driven household savings are a genuine, if modest, improvement in the affordability environment. Buyers who are close to their deposit target or close to qualifying for an NHT mortgage should recalculate their position in light of the electricity and fuel savings that lower oil prices have delivered. A few thousand dollars a month, consistently saved, has meaningful implications for deposit accumulation timelines.

For developers and investors, the combination of sustained NHT demand and the earliest signs of market confidence improvement argue for attention to the affordable and mid-market segments. The supply deficit has been deepening for years; when the macro conditions eventually improve sufficiently to release the pent-up demand that the adjustment period has been suppressing, the developers positioned in the right segments will benefit disproportionately.

The Outlook: Patience Required, Progress Possible

The spring of 2015 presents Jamaica’s housing market with marginal improvement rather than decisive change. The oil dividend is real but modest. The IMF programme is working but constraining. The rate environment is stable but not improving yet. The supply deficit is unchanged. The patient household — maintaining NHT contributions, accumulating deposit savings, monitoring scheme availability — is doing the right things. The impatient market that wants transformation by the next quarter will be disappointed. Jamaica’s housing story in 2015 is, like the broader economy it sits within, a story of staying the course through the adjustment’s remaining years toward the improvement that is not yet here but is not imaginary either.

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

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