A Clean Season: Jamaica Closes Q3 2018 Without a Hurricane and With a Market Still Moving Forward

Valuation Reform: The Gap Between Books and Reality

An issue that had been accumulating quietly through the boom years began to surface more visibly in the third quarter: the divergence between the Valuation Office’s assessed unimproved values — the basis for property tax — and the market values at which properties were actually transacting. The KMA’s premium segment had appreciated at fifteen to twenty percent annually in 2016 and 2017, and at ten to twelve percent in the first half of 2018. The Valuation Office’s rolling reassessment programme, which had historically struggled to keep pace with rapid market movements, had generated unimproved values that in some areas reflected market conditions two to three years out of date. The consequence was a property tax burden that did not reflect current asset values, representing an implicit subsidy to property owners and a constraint on local government revenue capacity.

The reassessment programme that the Valuation Office was beginning to implement systematically in the KMA was designed to close this gap — a process that would, when completed, result in property tax assessments that more accurately reflected the appreciation of the preceding three years. For current owners, this meant the prospect of higher tax bills on their now-more-valuable assets. For the market, it meant that the effective holding cost of property would increase modestly for those segments where appreciation had been greatest. The timing of the reassessment, and the administrative capacity to execute it, remained uncertain. But the direction was clear.

What This Means

The third quarter of 2018 confirms that the market’s expansion phase has entered a more mature stage: less exuberant than 2017, more broad-based and self-sustaining. The absence of hurricane disruption has allowed the seasonal transaction pattern to flatten — a sign of underlying demand depth that doesn’t require favourable weather conditions to express itself. The valuation reassessment issue is manageable but will require attention from both property owners and policymakers as it progresses. And the short-term rental market’s rapid growth is generating the tensions that regulators in larger Caribbean markets have been managing for several years and that Jamaica will need to address with its own framework before long.

The fourth quarter outlook is positive. Hurricane risk diminishes after October. The holiday season typically generates diaspora property visits and purchase decisions. And the pipeline of new scheme completions entering the market provides a range of supply that supports transaction volumes even when the secondary market is quiet. The market enters its final quarter of the year in better shape than any comparable point in the post-crisis decade.

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jamaica-homes.com | Market Analysis | Q3 2018

For the second consecutive year, Jamaica’s hurricane season closed without a direct hit on the island’s most valuable property corridors. The market absorbed the seasonal anxiety and moved on. The numbers for Q3 confirm steady expansion.

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• No major hurricane makes landfall in Jamaica in 2018; north-coast market confidence intact
• Q3 transaction volumes sustain the levels of Q1 and Q2; seasonal slowdown minimal
• Mortgage interest rates at commercial banks begin to edge lower as competition intensifies
• Short-term rental supply on Jamaica’s north coast increases twenty-five percent year-on-year
• Valuation Office begins systematic reassessment programme in KMA; market values diverge from unimproved values
• GDP growth tracking toward two percent for 2018; seventh consecutive year of expansion

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The third quarter of 2018 passed without the dramatic meteorological event that Jamaica’s property market had learned, over a decade of post-Ivan vigilance, to hold at the edge of its consciousness from August through October. The Atlantic hurricane season produced several named storms, some of them significant, but none tracked close enough to the island to produce the kind of anxiety that had briefly suspended the market in the comparable period of 2016 and 2017. Jamaica, for the second consecutive year, was spared. The market, for the second consecutive year, was able to operate through its most traditionally volatile seasonal window without interruption, and the third quarter’s transaction volumes reflected this: they were consistent with the Q1 and Q2 pace, and the seasonal slowdown that had historically characterised the August holiday period was less pronounced than in previous years.

The mortgage market was evolving in ways that were, for buyers, materially positive. Commercial banks had been competing for the NHT’s mortgage volume since the rate environment normalised after the EFF, and in the third quarter that competition was visible in the form of modest but meaningful reductions in quoted mortgage rates for qualified borrowers. The standard commercial bank rate for a twenty-year residential mortgage had been falling gradually from its post-crisis highs, and by mid-2018 had reached levels that were offering first-time buyers monthly payment obligations meaningfully below what they would have faced with equivalent borrowing in 2012 or 2013. The cumulative effect of this compression — lower rates applied to a tax-reformed market with no stamp duty — was an effective cost-of-ownership reduction that was significant for the first-time buyer cohort.

The short-term rental market on the north coast was growing faster than any other sub-segment of the Jamaican property market by this measure. The number of properties listed on the major short-stay platforms in the Montego Bay, Ocho Rios, and Runaway Bay corridors had increased by approximately twenty-five percent over the preceding twelve months, reflecting both the acquisition of new properties by diaspora investors and the conversion of existing properties from long-term to short-term tenancy by owners attracted by the yield differential. The growth was creating both opportunities and tensions: opportunities for the investors whose economics were working well, and tensions for the long-term rental market in resort communities where the conversion of housing stock to short-stay use was tightening the supply available to permanent residents.

Valuation Reform: The Gap Between Books and Reality

An issue that had been accumulating quietly through the boom years began to surface more visibly in the third quarter: the divergence between the Valuation Office’s assessed unimproved values — the basis for property tax — and the market values at which properties were actually transacting. The KMA’s premium segment had appreciated at fifteen to twenty percent annually in 2016 and 2017, and at ten to twelve percent in the first half of 2018. The Valuation Office’s rolling reassessment programme, which had historically struggled to keep pace with rapid market movements, had generated unimproved values that in some areas reflected market conditions two to three years out of date. The consequence was a property tax burden that did not reflect current asset values, representing an implicit subsidy to property owners and a constraint on local government revenue capacity.

The reassessment programme that the Valuation Office was beginning to implement systematically in the KMA was designed to close this gap — a process that would, when completed, result in property tax assessments that more accurately reflected the appreciation of the preceding three years. For current owners, this meant the prospect of higher tax bills on their now-more-valuable assets. For the market, it meant that the effective holding cost of property would increase modestly for those segments where appreciation had been greatest. The timing of the reassessment, and the administrative capacity to execute it, remained uncertain. But the direction was clear.

What This Means

The third quarter of 2018 confirms that the market’s expansion phase has entered a more mature stage: less exuberant than 2017, more broad-based and self-sustaining. The absence of hurricane disruption has allowed the seasonal transaction pattern to flatten — a sign of underlying demand depth that doesn’t require favourable weather conditions to express itself. The valuation reassessment issue is manageable but will require attention from both property owners and policymakers as it progresses. And the short-term rental market’s rapid growth is generating the tensions that regulators in larger Caribbean markets have been managing for several years and that Jamaica will need to address with its own framework before long.

The fourth quarter outlook is positive. Hurricane risk diminishes after October. The holiday season typically generates diaspora property visits and purchase decisions. And the pipeline of new scheme completions entering the market provides a range of supply that supports transaction volumes even when the secondary market is quiet. The market enters its final quarter of the year in better shape than any comparable point in the post-crisis decade.

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jamaica-homes.com | Market Analysis | Q3 2018

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