Jamaica Homes Monthly Mortgage & Housing Finance Review — October 2017

Publication date: 5 November 2017 | Covering: October 2017

Monthly Briefing

• Fed balance sheet normalization begins October 2017 as announced; gradual cap approach; US$10bn initial monthly reduction
• US tax reform: House passes bill October 26; Senate working on its version; corporate rate cut focus
• Las Vegas mass shooting October 1: Deadliest in US history at that time; 60 killed
• Hurricane season aftermath: Harvey, Irma, Maria; Puerto Rico devastation ongoing; economic cost enormous
• US equity markets hit new all-time highs through October; global synchronised growth narrative
• BOJ easing; Jamaica tourism sector resilient despite Irma; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent

Balance Sheet Normalization Begins and Tax Reform Advances

The Federal Reserve’s balance sheet normalization programme, announced at the September meeting, began as scheduled in October 2017. The programme involves allowing maturing Treasury securities and mortgage-backed securities to roll off the balance sheet rather than being reinvested, subject to monthly caps that start at US$10 billion total (US$6 billion Treasuries, US$4 billion MBS) and increase every three months until reaching a maximum of US$50 billion per month. The gradual, predictable nature of the programme was deliberately designed to be as low-impact as possible, with Fed officials repeatedly describing it as “like watching paint dry”. Financial markets absorbed the announcement and the commencement of the programme with considerable equanimity: US equities hit new all-time highs through October, credit spreads remained tight, and risk appetite was broadly positive, reflecting the synchronised global growth environment rather than concerns about balance sheet tightening.

The US Congress made the most significant advance yet on tax reform in October. The House of Representatives passed the Tax Cuts and Jobs Act on 16 November (though the bill would be amended further), and Senate leadership worked to advance its own version. The prospect of corporate tax reduction from 35 per cent to 21 per cent was the primary market catalyst, with equity analysts revising up earnings forecasts for 2018 in anticipation. The tax reform debate was also important for Jamaica: stronger US growth from fiscal stimulus would support tourism and remittances, while any associated fiscal deficit expansion had implications for US sovereign creditworthiness and Treasury yields over the medium term.

Hurricane Season Devastation and Caribbean Resilience

The 2017 Atlantic hurricane season was among the most destructive on record. Hurricane Harvey struck Texas in late August, producing catastrophic flooding in Houston. Hurricane Irma — the most powerful Atlantic hurricane ever recorded — struck Caribbean islands in early September before making landfall in Florida, and Hurricane Maria devastated Puerto Rico on 20 September, leaving the island without power for months and producing an enormous humanitarian crisis. The total economic damage from the three storms was estimated at more than US$200 billion. Jamaica was spared the worst of the 2017 season, but the devastation of Caribbean neighbours — particularly Barbuda, Saint Maarten, and Puerto Rico — was deeply felt in the region, and the economic disruption to Caribbean tourism circuits was a relevant concern for Jamaica’s own tourism-dependent economy.

Jamaica’s Mortgage Market Through October

Jamaica’s residential mortgage market maintained solid conditions through October 2017. The Bank of Jamaica’s monetary easing had improved the domestic credit environment, and the NHT’s J$6.5 million ceiling and subsidised rate structure continued to support affordable home ownership. Jamaica’s tourism sector, while monitoring the regional hurricane impacts on visitor perceptions, had seen a broadly resilient season, and the island’s fiscal programme continued its consolidation trajectory. The improving macroeconomic environment supported household income growth, which in turn underpinned the demand for residential property and the serviceability of new and existing mortgages.

Looking Ahead

The Federal Reserve’s November 1 meeting will hold rates steady, with December’s hike now near-universally anticipated. The US tax reform debate will continue through November as the Senate and House work to reconcile their respective bills. For Jamaica, the hurricane season’s impact on Caribbean tourism reputation and the broader regional economic environment will be monitored alongside the evolution of the US fiscal and monetary policy outlook.

Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.