Jamaica Real Estate Roundup — Q2 2022: When the Cost of Money Changed Everything

• BOJ hikes to 5.00% in May, then 5.50% in June — 400bps in nine months.
• Inflation hits 11.8% in April — ninth straight month above the 6% ceiling.
• Russia-Ukraine war drives steel, cement and fuel to multi-year highs.
• Tourism recovery accelerates; Montego Bay hotel pipeline remains active.
• First affordability cracks appear in the strata apartment market.

The second quarter of 2022 was the quarter in which Jamaica’s property market began to feel, in earnest, the weight of what the Bank of Jamaica had been building since October 2021. The overnight policy rate, which the BOJ’s Monetary Policy Committee had raised from 0.50 per cent in the first of its historic tightening moves nine months earlier, reached 5.00 per cent on May 19 and then 5.50 per cent on June 30 — two further fifty-basis-point increases in a cycle that had now accumulated 500 basis points of tightening without a pause. Commercial lending rates were following the policy rate upward, and for the first time since the pandemic, the question of whether buyers could afford to borrow was becoming as important a market variable as whether they wanted to buy.

The April 2022 inflation data, published in May, confirmed what the BOJ’s statements had been signalling: at 11.8 per cent year-on-year, consumer price inflation had now been above the upper limit of the four-to-six per cent target range for nine consecutive months. The sources of the inflation were both global and domestic. Globally, the Russia-Ukraine war — which had begun on February 24, 2022 — was driving energy and food commodity prices to multi-year highs. Brent crude oil had moved sharply above US$100 per barrel in the weeks following the invasion and remained elevated through the quarter. Global wheat prices, of which Russia and Ukraine are collectively among the world’s largest exporters, had risen significantly. Domestically, the pass-through of global fuel costs into transport, electricity and agricultural production was adding pressure to a consumer price environment that was already being affected by the tail end of pandemic-era supply chain disruptions. The BOJ was explicit in its Q2 rate decisions that these were primarily supply-side inflationary forces, but that the persistence and breadth of the inflation warranted continued monetary tightening to prevent the development of second-round effects through wage and price-setting behaviour.

For the mortgage market, the cumulative effect of five rate increases since October 2021 was being transmitted into commercial lending rates with a lag that was now closing. The weighted average commercial bank lending rate was moving in step with the policy rate as the quarter progressed, and the implication for qualifying borrowers was significant: a buyer who had been assessed for a mortgage at the rate environment prevailing in, say, March 2021, would now find that their qualifying loan amount had reduced materially for the same income and the same monthly payment capacity. The arithmetic of interest rate risk was becoming real for a borrower population that had, for most of the post-2010 decade, experienced only declining or stable borrowing costs.

Russia-Ukraine and the Construction Cost Crisis

For Jamaica’s development sector, the Russia-Ukraine war’s most significant impact was not transmitted through the mortgage market but through the construction cost environment. Steel rebar — the essential structural component of reinforced concrete construction, which dominates Jamaica’s medium and high-density residential development — is priced on global commodity markets that responded sharply to the war’s disruption of Ukrainian steel production, which had been a significant contributor to global supply. The price of steel in Jamaica had risen sharply since February 2022, adding to increases that had already been accumulating from pandemic-era global supply chain disruptions since 2020.

Cement, the other critical structural material, was facing its own cost pressures. The energy intensity of cement production meant that the global oil price spike was feeding directly into production costs. For developers who had committed to fixed-price or cost-plus construction contracts in the market conditions of 2020 or early 2021, the Q2 2022 environment represented a significant departure from the financial model on which their projects had been underwritten. The most immediately visible consequence was in project timelines: where developers had flexibility, the rational response to an environment of rising material costs and rising financing costs was to reassess the sequencing of development phases, delay the commencement of new construction where the economics had deteriorated materially, and focus resources on completing and transferring units in projects that were already sufficiently advanced to have locked in a portion of their cost base.

The fuel cost element of the construction environment was adding a further layer of complexity. Jamaica is almost entirely dependent on imported petroleum products for energy, and the global oil price surge that followed the Russia-Ukraine invasion translated directly into higher costs for construction plant and equipment operation, materials transport, and the diesel-powered generators that many construction sites rely upon. The aggregate effect of steel, cement, fuel and skilled labour cost increases was pushing the all-in cost of residential construction in the Kingston metropolitan area to levels that tested the financial viability of schemes that had been designed around different cost assumptions.

Tourism: The Recovery That Arrived

Against the economic headwinds from inflation and construction costs, the tourism sector’s Q2 2022 performance was a significant positive signal. The second quarter — April through June — is historically a transitional period for Jamaica’s tourism calendar, bridging the winter peak season from the slower summer months before the North American summer travel market brings its own demand surge. The 2022 second quarter delivered arrivals data that significantly exceeded the comparable 2021 period — when global travel had been severely constrained by COVID-19 — and was tracking toward or above the 2019 pre-pandemic baseline in several key metrics.

Hotel occupancy rates in the primary resort destinations — Montego Bay, Negril, Ocho Rios and the south coast properties — were operating at levels that supported the commercial case for ongoing and planned hotel development investment. The BOJ’s tourism data suggested that the sector was on a trajectory that would see full-year 2022 arrivals approach or match Jamaica’s 2019 record, a recovery that would be remarkable in its speed relative to the depth of the pandemic-era contraction. For the construction sector, the hotel development pipeline was providing a stream of activity — new resort builds, major refurbishments of existing properties ahead of the arrival of competing inventory — that was partially offsetting the cooling in residential development economics.

Residential Market: The Boom’s Changing Character

The residential market in Q2 2022 was in a state of transition that was not yet fully visible in the transaction data but was legible in the texture of market activity. The underlying demand drivers — the island’s persistent housing deficit, the young population’s homeownership aspirations, the diaspora’s ongoing appetite for investment in Jamaican property, and the post-pandemic reassessment of living arrangements that had redirected demand toward larger and better-appointed homes — were still present and still generating enquiries. But the conversion of enquiry to committed purchase was becoming more conditional than it had been in the peak months of the 2020-2021 boom.

The segment most immediately affected was the entry-level and lower-middle strata apartment market: the one-bedroom and two-bedroom units that had been the backbone of the strata development boom, sold in pre-construction to buyers whose mortgage qualifying was most sensitive to interest rate movements. A buyer who had committed to a pre-construction purchase eighteen months earlier at an interest rate assumption of, say, five per cent per annum commercial rate was now looking at a rate environment that was moving toward and potentially above that level on the commercial banks’ published rates — and still rising. For buyers who had not yet committed, the qualifying calculation had already changed significantly.

The National Housing Trust remained the market’s primary stabilising force at the affordable end of the spectrum. The Trust’s lending rates, set to provide access to homeownership for contributing workers across the income distribution, were not moving in lockstep with the commercial banks. The NHT’s rate structure and its social mandate insulated a significant segment of the market from the full impact of the BOJ’s tightening cycle. Demand for NHT mortgage facilities was strong, and the Trust’s pipeline of housing solutions — both through its own development programme and through its open market lending — was continuing to serve the large majority of Jamaican working households who would never qualify for a commercial bank mortgage in the current environment.

Upper-Market and Resort Property

At the upper end of the market — where buyers were either less dependent on mortgage financing or were drawing on diaspora capital, investment returns or business equity rather than personal income-based mortgage qualification — the Q2 2022 environment was less immediately disruptive. The Kingston premium residential market in areas like Cherry Gardens, Norbrook, Jack’s Hill and the newer luxury strata developments in New Kingston and Barbican was experiencing solid if not spectacular demand. These buyers’ purchasing decisions were less sensitive to the cost of a fixed-rate NHT or commercial mortgage and more sensitive to investment confidence, political stability, crime perception and the long-term trajectory of the island’s economy.

On this latter dimension, Jamaica’s economic fundamentals remained broadly supportive. GDP growth had been strong in fiscal 2021/22, and the economy’s recovery from the pandemic was proceeding at a pace that compared favourably with regional peers. The government’s ongoing relationship with the International Monetary Fund — by mid-2022, Jamaica had successfully exited its IMF programme and retained a precautionary standby arrangement — was providing a framework of fiscal discipline that supported investor confidence in the island’s macro environment. The tourism sector’s strong recovery was adding to the foreign exchange inflows that supported the Jamaica dollar and reduced the exchange rate risk that had historically been a concern for property investors holding local currency assets.

Strata Registration and Developer Activity

The pipeline of registered strata developments — a useful leading indicator of the market’s supply trajectory when measured against registration data from the National Land Agency — reflected the boom’s momentum even as the Q2 2022 market conditions were beginning to moderate the pace of new launches. Developments registered in 2020 and 2021, when financing and construction cost conditions were both more favourable, were proceeding toward completion. The Kingston metropolitan area remained the primary concentration of strata development activity, with Portmore, Spanish Town and the expanding suburban zones of St Catherine also attracting developer attention for more affordable, town-house style product.

New launches in Q2 2022 were more measured than those of 2021. Developers who understood the market trajectory were presenting projects with greater emphasis on the value proposition: the amenity package, the quality of finishes, the management regime of the strata corporation and the location’s connectivity to the employment centres, schools and commercial services that buyers were prioritising. The pre-sale velocity that characterised 2021 launches — units allocated within days or weeks of a project’s marketing launch — was not the universal experience of Q2 2022. But projects with demonstrably superior locations or compelling value at their price points were still achieving strong pre-sale commitments, suggesting that the market’s differentiation had increased rather than the underlying demand having evaporated.

Outlook for the Second Half

The second half of 2022 opens with the BOJ at 5.50 per cent, inflation above ten per cent and the tightening cycle explicitly described by the Bank’s Monetary Policy Committee as ongoing. Market analysts expecting the rate to peak somewhere in the six-to-seven per cent range before the end of the year are watching the October and November MPC meetings as the likely venues for the final increments of the cycle, assuming the inflation data moves in the direction that the BOJ’s models project. A gradual easing in commodity price pressures as the Russia-Ukraine situation stabilises and global supply chains continue their post-pandemic normalisation is the base case for inflation to begin returning toward target — but that process is measured in quarters, not weeks.

For the property market, the second half of 2022 will be a period of adjustment to a new cost of capital reality. The boom conditions of 2020 and 2021 were, in significant part, a product of an exceptional monetary environment that is now being unwound. The market that emerges from this adjustment will not be the same as the market that entered it — the buyers who can qualify, the prices that can clear, the developers whose business models remain viable will all be shaped by where rates settle and how long they hold. Jamaica’s property fundamentals — the persistent housing deficit, the demographic demand and the diaspora’s enduring connection to the island — remain compelling. But the near-term environment is one that rewards prudence and penalises leverage more than the market has done at any point in the preceding five years.

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