Matthew’s Mark: Jamaica Closes 2016 With a Year of Reform, a Hurricane, and a Market That Held

The Fiscal Responsibility Framework and What Comes After the IMF

The Holness government tabled the Fiscal Responsibility Framework legislation in the fourth quarter, completing the architecture of domestic fiscal discipline that the EFF’s external conditionality had previously provided. The Framework set numerical targets for the primary surplus, the debt-to-GDP ratio, and the current account balance, with reporting requirements and a compliance mechanism intended to give the commitments institutional durability beyond any single parliamentary cycle. The markets received the legislation without the alarm that sometimes accompanies the removal of external anchors, partly because the underlying fiscal performance had been strong and partly because the Holness administration’s stated intention to seek a successor IMF arrangement — a Precautionary and Liquidity Line or similar facility — provided an additional credibility bridge.

For the property sector, the significance of the Framework was perhaps best understood in terms of what it was designed to prevent: the kind of fiscal slippage that had historically produced currency crises, interest rate spikes, and the sudden collapse of mortgage affordability that had periodically wiped out years of market recovery. If the Framework held — if successive governments honoured its targets — then the rate environment of the EFF years could be maintained beyond the programme’s formal life. That was not guaranteed. But it was, for the first time in Jamaica’s modern fiscal history, structurally targeted in a way that bound future administrations in law.

What This Means

Jamaica closes 2016 with a property market that is, by every quantitative measure, the healthiest it has been since the pre-crisis peak. Transaction volumes are at a decade high. Prices have recovered across all major segments. The transaction cost burden has been halved. Interest rates are at a generational low. GDP is growing for a fifth consecutive year. And the fiscal framework is being institutionalised in domestic law.

Against this, the risks are real but bounded. Matthew has demonstrated that climate exposure is a genuine valuation factor in southern and western Jamaica. The one-seat parliamentary majority constrains the government’s room for manoeuvre. The new US administration taking office in January brings external uncertainty that could affect remittance flows and diaspora investment appetite. And the domestic Fiscal Responsibility Framework has yet to face its first serious test. The year ahead will not be without challenges. But the market entering 2017 is doing so from a position of strength that would have seemed improbable in 2010, and almost unimaginable in 2013.

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jamaica-homes.com | Market Analysis | Q4 2016

The Year in Review: Five for Five

Setting aside October’s interruption, 2016 was a year that delivered on the reform promises that had been made at election time and confirmed what the previous three EFF years had suggested: Jamaica’s property market had completed a genuine structural recovery. Full-year conveyancing volumes, measured by transfer registrations at the National Land Agency, were on course to be the highest recorded since 2006 — the year before the global financial crisis began draining investment confidence from emerging markets. The stamp duty abolition enacted in May had unlocked a layer of mid-market activity that had been suppressed not by lack of demand but by the friction of transaction costs, and the second and third quarters had provided the data to confirm it.

GDP growth for the full year was being estimated by analysts at approximately one point four percent, which would represent the fifth consecutive year of positive growth — a sequence without precedent in Jamaica’s economic history since the 1970s. The economy was not growing at the pace that the country’s demography and infrastructure deficit required, but it was growing consistently and, for the first time in a generation, with a credible fiscal framework underpinning the trajectory. The primary surplus was being maintained. Debt was declining as a share of GDP. Inflation, which had eroded the purchasing power of Jamaican households through most of the preceding two decades, was running below five percent and trending lower.

For property buyers, the interest rate implications of this macro-fiscal improvement were the most direct transmission channel. Treasury bill rates, which had been above ten percent as recently as 2012, had fallen below six percent and were holding there. Commercial bank mortgage rates, which had historically carried a three-to-four-hundred basis point spread above the treasury bill benchmark, were being offered in ranges that gave first-time buyers access to twenty-year mortgages at rates their parents’ generation would not have recognised as Jamaican. The NHT’s mortgage rate, adjusted downward during the EFF period, remained the floor against which private lenders competed.

The Fiscal Responsibility Framework and What Comes After the IMF

The Holness government tabled the Fiscal Responsibility Framework legislation in the fourth quarter, completing the architecture of domestic fiscal discipline that the EFF’s external conditionality had previously provided. The Framework set numerical targets for the primary surplus, the debt-to-GDP ratio, and the current account balance, with reporting requirements and a compliance mechanism intended to give the commitments institutional durability beyond any single parliamentary cycle. The markets received the legislation without the alarm that sometimes accompanies the removal of external anchors, partly because the underlying fiscal performance had been strong and partly because the Holness administration’s stated intention to seek a successor IMF arrangement — a Precautionary and Liquidity Line or similar facility — provided an additional credibility bridge.

For the property sector, the significance of the Framework was perhaps best understood in terms of what it was designed to prevent: the kind of fiscal slippage that had historically produced currency crises, interest rate spikes, and the sudden collapse of mortgage affordability that had periodically wiped out years of market recovery. If the Framework held — if successive governments honoured its targets — then the rate environment of the EFF years could be maintained beyond the programme’s formal life. That was not guaranteed. But it was, for the first time in Jamaica’s modern fiscal history, structurally targeted in a way that bound future administrations in law.

What This Means

Jamaica closes 2016 with a property market that is, by every quantitative measure, the healthiest it has been since the pre-crisis peak. Transaction volumes are at a decade high. Prices have recovered across all major segments. The transaction cost burden has been halved. Interest rates are at a generational low. GDP is growing for a fifth consecutive year. And the fiscal framework is being institutionalised in domestic law.

Against this, the risks are real but bounded. Matthew has demonstrated that climate exposure is a genuine valuation factor in southern and western Jamaica. The one-seat parliamentary majority constrains the government’s room for manoeuvre. The new US administration taking office in January brings external uncertainty that could affect remittance flows and diaspora investment appetite. And the domestic Fiscal Responsibility Framework has yet to face its first serious test. The year ahead will not be without challenges. But the market entering 2017 is doing so from a position of strength that would have seemed improbable in 2010, and almost unimaginable in 2013.

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jamaica-homes.com | Market Analysis | Q4 2016

Hurricane Matthew struck Jamaica’s southern parishes in early October, causing localised devastation but leaving the wider property market’s momentum largely intact. The year ends with the market structurally stronger than any year since 2006.

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• Hurricane Matthew passes near Jamaica October 4–5 as Category 4; southern parishes worst affected
• St. Elizabeth, Westmoreland flood damage significant; rural housing stock worst impacted
• KMA and north coast property markets resume normal activity within two weeks of storm
• Full-year conveyancing volumes highest since 2006; stamp duty reform credited
• GDP growth estimated 1.4 percent for 2016; fifth consecutive year of positive growth
• Holness government tables Fiscal Responsibility Framework; domestic discipline architecture complete

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Hurricane Matthew arrived on the morning of October 4 as a Category 4 storm tracking north-northwest, skirting Jamaica’s southwestern coastline with sustained winds of more than two hundred and thirty kilometres per hour and a storm surge that pushed the sea inland across the low-lying parishes of St. Elizabeth, Westmoreland, and Hanover. The damage to agricultural land, rural infrastructure, and the housing stock of the southern and western parishes was significant. Landslides severed road links. The fishing industries of Treasure Beach and Black River were set back by months. Communities that had experienced the peripheral passage of Ivan in 2004 faced a similar reckoning a dozen years later.

For the property market, Matthew’s impact was real but geographically concentrated. The parishes most affected — St. Elizabeth, Westmoreland, and sections of St. Catherine near the coast — are not the parishes that drive the national market’s headline volumes. The Kingston Metropolitan Area, which accounts for the majority of residential and commercial property transactions by value, reported minimal structural damage. The north coast resort corridor, which had been the most dynamic land market in the country for the preceding twelve months, was largely spared. Within a fortnight of the storm’s passage, conveyancing activity in Kingston and the major commercial centres had returned to pre-storm levels. The transactional momentum that had built through the second and third quarters proved more durable than a single weather event, however severe, could interrupt.

The experience was nonetheless instructive. Real estate professionals in the affected parishes noted that properties in storm-prone low-lying areas were beginning to attract a meaningful insurance premium in buyers’ minds, and that transactions in flood-mapped zones were proceeding at discounts relative to equivalent properties on higher ground. The trend was not new — Jamaican buyers had been sensitive to hurricane exposure since Ivan — but Matthew’s specific geography sharpened the market’s awareness of elevation and drainage as valuation factors in ways that were likely to persist beyond the immediate recovery period.

The Year in Review: Five for Five

Setting aside October’s interruption, 2016 was a year that delivered on the reform promises that had been made at election time and confirmed what the previous three EFF years had suggested: Jamaica’s property market had completed a genuine structural recovery. Full-year conveyancing volumes, measured by transfer registrations at the National Land Agency, were on course to be the highest recorded since 2006 — the year before the global financial crisis began draining investment confidence from emerging markets. The stamp duty abolition enacted in May had unlocked a layer of mid-market activity that had been suppressed not by lack of demand but by the friction of transaction costs, and the second and third quarters had provided the data to confirm it.

GDP growth for the full year was being estimated by analysts at approximately one point four percent, which would represent the fifth consecutive year of positive growth — a sequence without precedent in Jamaica’s economic history since the 1970s. The economy was not growing at the pace that the country’s demography and infrastructure deficit required, but it was growing consistently and, for the first time in a generation, with a credible fiscal framework underpinning the trajectory. The primary surplus was being maintained. Debt was declining as a share of GDP. Inflation, which had eroded the purchasing power of Jamaican households through most of the preceding two decades, was running below five percent and trending lower.

For property buyers, the interest rate implications of this macro-fiscal improvement were the most direct transmission channel. Treasury bill rates, which had been above ten percent as recently as 2012, had fallen below six percent and were holding there. Commercial bank mortgage rates, which had historically carried a three-to-four-hundred basis point spread above the treasury bill benchmark, were being offered in ranges that gave first-time buyers access to twenty-year mortgages at rates their parents’ generation would not have recognised as Jamaican. The NHT’s mortgage rate, adjusted downward during the EFF period, remained the floor against which private lenders competed.

The Fiscal Responsibility Framework and What Comes After the IMF

The Holness government tabled the Fiscal Responsibility Framework legislation in the fourth quarter, completing the architecture of domestic fiscal discipline that the EFF’s external conditionality had previously provided. The Framework set numerical targets for the primary surplus, the debt-to-GDP ratio, and the current account balance, with reporting requirements and a compliance mechanism intended to give the commitments institutional durability beyond any single parliamentary cycle. The markets received the legislation without the alarm that sometimes accompanies the removal of external anchors, partly because the underlying fiscal performance had been strong and partly because the Holness administration’s stated intention to seek a successor IMF arrangement — a Precautionary and Liquidity Line or similar facility — provided an additional credibility bridge.

For the property sector, the significance of the Framework was perhaps best understood in terms of what it was designed to prevent: the kind of fiscal slippage that had historically produced currency crises, interest rate spikes, and the sudden collapse of mortgage affordability that had periodically wiped out years of market recovery. If the Framework held — if successive governments honoured its targets — then the rate environment of the EFF years could be maintained beyond the programme’s formal life. That was not guaranteed. But it was, for the first time in Jamaica’s modern fiscal history, structurally targeted in a way that bound future administrations in law.

What This Means

Jamaica closes 2016 with a property market that is, by every quantitative measure, the healthiest it has been since the pre-crisis peak. Transaction volumes are at a decade high. Prices have recovered across all major segments. The transaction cost burden has been halved. Interest rates are at a generational low. GDP is growing for a fifth consecutive year. And the fiscal framework is being institutionalised in domestic law.

Against this, the risks are real but bounded. Matthew has demonstrated that climate exposure is a genuine valuation factor in southern and western Jamaica. The one-seat parliamentary majority constrains the government’s room for manoeuvre. The new US administration taking office in January brings external uncertainty that could affect remittance flows and diaspora investment appetite. And the domestic Fiscal Responsibility Framework has yet to face its first serious test. The year ahead will not be without challenges. But the market entering 2017 is doing so from a position of strength that would have seemed improbable in 2010, and almost unimaginable in 2013.

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jamaica-homes.com | Market Analysis | Q4 2016

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