Oil Dividend and the Construction Sector: Lower Costs Begin to Percolate — June 2015

Publication Date: 3 June 2015 | Coverage Period: 3 May – 2 June 2015 | Category: Monthly Review

May 2015 in Brief

• Oil prices holding near US$60 per barrel; construction fuel savings becoming visible in project budgets
• JPS electricity tariff reductions improving household disposable income for mortgage holders
• NHT mortgage portfolio outstanding climbs to approximately J$221 billion
• Private developers accelerating completions in St. Catherine and St. James parishes
• BOJ policy rate at approximately 5.75%; gradual easing widely anticipated
• HAJ land titling programme progressing in several rural communities

Housing Market Overview

Jamaica’s housing market in May 2015 showed the early contours of a mild improvement in sentiment, driven not by any structural policy shift but by the quiet arithmetic of lower energy costs. The collapse in global crude oil prices that began in the second half of 2014 has now been sustained for long enough that its effects are showing up in project cash flows, household electricity bills, and the operating costs of the businesses that supply the construction sector.

Transaction volumes in the residential market remain moderate. The Kingston Metropolitan Area continues to anchor formal activity, with Portmore and adjacent communities in St. Catherine generating consistent demand for affordable and lower-middle-income units. However, the supply pipeline is beginning to expand as developers with pre-approved schemes bring projects to site, encouraged in part by improved margin expectations driven by lower fuel costs.

The upper residential market — units above J$25 million, concentrated on the north coast and in the elevated communities of St. Andrew and St. Catherine — remains active in a limited way. Buyers in this segment are less rate-sensitive and more motivated by lifestyle considerations, diaspora capital deployment, and the underlying scarcity of quality finished product. New listings in this tier are moving at a measured pace but without the extended marketing periods observed in 2013 and early 2014.

The Oil Price Dividend: Construction Costs Under the Microscope

With Brent crude oil trading near US$60 per barrel — compared with above US$100 per barrel just a year ago — the cost savings flowing through to Jamaica’s construction industry are becoming visible and measurable. Diesel fuel, the principal energy input for on-site machinery including excavators, concrete mixers, and generators, is substantially cheaper at the pump than in 2014. This directly reduces operating costs for contractors on active development sites.

The electricity tariff charged by the Jamaica Public Service Company adjusts monthly based in part on the weighted average fuel cost used to generate power. Over the past six months, tariff reductions have compounded. For a construction project consuming several hundred thousand kilowatt-hours across its build cycle, the savings are non-trivial. One industry estimate suggests that fuel-related cost reductions are shaving 3–6% off total project budgets compared with equivalent projects costed in 2013–2014, depending on project type and duration.

For homeowners and mortgage holders, lower electricity bills represent an improvement in household cash flow. A family paying J$15,000–25,000 per month in electricity costs and servicing a mortgage simultaneously finds that reduced utility bills — even a reduction of J$3,000–5,000 monthly — provide meaningful relief against a budget that, at current commercial mortgage rates, leaves little discretionary room. This effect, while incremental, is real and accumulating.

Government Policy: NHT, HAJ, and the Consolidation Constraint

The National Housing Trust’s mortgage portfolio continues to grow. With outstanding loans now estimated at approximately J$221 billion and the Trust maintaining approximately half of total residential mortgage market share, its policy decisions ripple immediately through the market. The ongoing debate over the J$11.4 billion annual transfer to the Consolidated Fund has not abated, and is likely to intensify as the fiscal year progresses and housing advocates quantify the volume of additional units that might have been funded in the absence of the transfer.

The NHT board and management have been measured in their public responses to the transfer controversy, emphasising that the institution remains financially robust and that its lending programme continues uninterrupted. However, with the loan ceiling still at approximately J$4.5 million — a level that critics note has lagged badly behind construction cost increases — the gap between what NHT can lend and what a new home costs remains a central affordability problem.

The Housing Agency of Jamaica is advancing its mandate of providing shelter solutions for lower-income Jamaicans. HAJ’s land titling programme — formalising ownership for informal settlement residents across multiple parishes — is an important component of housing policy that receives less public attention than NHT lending but is arguably as consequential for household wealth creation. Formal title enables families to use property as collateral, access formal credit, and invest in improvements with greater confidence of return.

Construction Activity by Parish

St. Catherine remains the most active parish for new residential construction by volume. The corridor from Greater Portmore through Old Harbour to Linstead is hosting multiple concurrent development schemes, both NHT-assisted and privately funded. Land availability, relatively lower per-square-foot costs compared to Kingston, and improving road infrastructure make St. Catherine the natural overflow valve for Kingston’s housing demand.

St. James — anchored by Montego Bay, Jamaica’s second city and primary tourism hub — is seeing construction activity in both the residential and hospitality sectors. New housing communities targeting middle-income buyers are under development in the hills above the city, where cooler temperatures and pleasant aspects justify premium pricing. Commercial construction in the tourism corridor also generates indirect housing demand from workers seeking accommodation near employment centres.

Kingston itself continues to see investment in apartment and condominium development, particularly in the New Kingston and Half-Way Tree commercial corridors. High land values and construction costs in the capital push projects toward the upper and upper-middle markets, but there is demonstrable demand from young professionals and dual-income households who prefer proximity to employment over the space offered by suburban communities.

Infrastructure and Enabling Environment

Road infrastructure continues to be a determinant of residential property values across Jamaica. Communities situated on well-maintained arterial routes command premiums over otherwise comparable properties accessible only via deteriorated local roads. The National Works Agency’s rehabilitation programme, supported by Inter-American Development Bank and Caribbean Development Bank lending, is targeting key corridors that unlock residential development potential.

Water supply reliability remains a persistent challenge for residential developers and homeowners alike. The National Water Commission’s infrastructure investment programme has not kept pace with demand growth in several high-population communities, creating a quality-of-life constraint that developers must factor into site selection and that buyers weigh heavily in purchase decisions. Communities with private or supplementary water supply solutions — storage tanks, community wells — command meaningful premiums.

Mortgage and Financial Markets

Commercial mortgage rates remain in the 9–12% annual range. The BOJ’s policy rate, at approximately 5.75%, anchors the risk-free rate from which commercial spreads are applied. Building societies and commercial banks have not moved significantly on mortgage pricing in recent months, though there is market expectation of a gradual downward drift as the BOJ’s easing cycle — broadly signalled but cautiously implemented — advances over the coming quarters.

The NHT’s zero-to-four percent interest rate structure for qualifying borrowers represents a subsidy that is the difference between homeownership and perpetual renting for the majority of Jamaica’s formal workforce. With commercial rates at their current levels, the NHT rate differential — approximately 6–8 percentage points — translates into monthly payment savings that can amount to tens of thousands of Jamaican dollars on a J$4–5 million loan. This differential underscores the societal importance of the NHT as an institution and the political sensitivity of any policy that affects its operational capacity.

Diaspora and International Investment

Remittance flows from the Jamaican diaspora, estimated at over US$2 billion annually, continue to support both household consumption and property investment. Real estate agents and developers active in the diaspora market report steady enquiries from UK and North American buyers, with interest concentrated in north coast properties, St. Andrew hill communities, and land purchases in rural parishes where family connections drive decisions.

The strength of the British pound — hovering near GBP/USD 1.52–1.55 and translating to approximately J$176–180 per pound — gives UK-based Jamaican buyers significant purchasing power relative to local market prices. A UK-resident buyer converting savings accumulated in sterling can acquire properties at price points that would be aspirational for most Jamaican resident earners. This dynamic supports demand at the middle and upper segments of the residential market from UK diaspora buyers.

Regional Context

The Caribbean Development Bank’s lending programme continues to support infrastructure investment across the region. Jamaica has drawn on CDB facilities for road, water, and housing infrastructure. The bank’s focus on climate resilience — an increasingly prominent agenda given the region’s vulnerability to extreme weather events — is influencing how new infrastructure investments are designed, with implications for building standards and land use planning in coastal and low-lying areas.

Cuba’s evolving relationship with the United States continues to generate speculation about the long-term competitive implications for Caribbean tourism. For Jamaica, the near-term outlook remains defined primarily by domestic economic factors rather than regional geopolitics, but real estate professionals with an eye on the longer term are watching developments in Havana with interest.

Looking Ahead

With the rainy season now underway, construction activity typically moderates in some segments, though well-capitalised developers maintain momentum on pre-approved schemes. The sustainability of sub-US$65 oil prices through the second half of 2015 is an open question that will materially affect the trajectory of construction costs and household energy bills. Any BOJ rate reduction in the coming months would be a market-positive signal. NHT policy watchers remain focused on whether a loan ceiling revision will be announced before year-end — a development that would broaden the base of housing market participants meaningfully.

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