Jamaica Homes Monthly Mortgage & Housing Finance Review — September 2022

Publication date: 5 October 2022 | Covering: September 2022

Monthly Briefing

• US Federal Reserve raises to 3.00–3.25 per cent on September 21; third consecutive 75bps hike
• UK’s September 23 mini-budget triggers gilt market crisis; sterling collapses against the dollar
• BOJ overnight rate rising through 2022 tightening cycle; further increases expected
• NHT individual limit at J$6.5 million; contributor rates 0, 2, 4 per cent insulate many buyers
• Jamaica hurricane season: Tropical Storm Ian causes damage in Cuba and Florida in late September
• Global energy crisis: European gas prices at extreme levels; Jamaica fuel costs remain elevated

US Federal Reserve: Third Consecutive 75bps Hike

The US Federal Reserve’s Federal Open Market Committee delivered its third consecutive 75 basis point rate increase at its September 20 to 21 meeting, raising the federal funds target range to 3.00 to 3.25 per cent. The September decision brought cumulative Fed tightening since March 2022 to 300 basis points, the fastest pace of rate increases in decades. Chair Jerome Powell’s September press conference was notably hawkish: he acknowledged the pain that rate increases impose on households and businesses but argued that restoring price stability was the prerequisite for sustainable economic growth. The Fed’s September Summary of Economic Projections pointed to a terminal rate above 4.50 per cent by the end of 2022, signalling further substantial increases at the November and December meetings.

The scale and speed of Fed tightening has rippled through global capital markets in ways that reach Jamaica. US dollar strength, driven by the widening interest rate differential between the United States and the rest of the world, has put depreciation pressure on virtually all currencies. The Jamaican dollar has faced this same pressure, requiring BOJ management through interventions and the maintenance of a credible interest rate differential through the domestic tightening cycle. The Fed’s continuing aggressiveness constrains the BOJ’s own room to pause — any slowdown in Jamaica’s tightening relative to the US risks widening the exchange rate gap and importing additional inflation.

UK Mini-Budget: A Global Market Shock

On September 23 — less than two weeks before this review is published — the UK government of Prime Minister Liz Truss delivered an emergency budget of unfunded tax cuts that sent shockwaves through global financial markets. UK gilt yields surged dramatically, sterling fell sharply against the dollar, and the Bank of England was forced to intervene with emergency bond purchases to prevent a collapse in pension fund positions. The episode was remarkable for its speed and severity: markets repudiated the fiscal expansion within hours of its announcement, and the IMF publicly criticised the policy in unusually direct terms. As of this writing, the Truss government has already partially reversed the budget’s most controversial element.

For Jamaica, the UK market turmoil is relevant primarily as a signal of how rapidly global sentiment can shift in a high-rate, high-inflation environment. Small open economies dependent on external financing must maintain policy credibility to avoid confidence crises. Jamaica’s track record of fiscal discipline — sustained through the IMF programme and its successors — provides an important buffer, but the UK episode is a reminder that fiscal and monetary policy credibility are not permanent entitlements: they must be continuously earned.

BOJ Tightening Cycle: Rate Environment Transformed

Jamaica’s own monetary tightening cycle has been among the more aggressive in the Caribbean region. The Bank of Jamaica moved early and decisively to raise the overnight policy rate through 2022, motivated by CPI inflation that has been tracking well above the 4.0 to 6.0 per cent target band throughout the year. The BOJ’s approach — front-loading tightening to arrest inflation expectations before they become embedded in wage and price-setting behaviour — has been broadly praised by external commentators, including those at the IMF and Caribbean Development Bank. The short-term cost, however, is felt in Jamaica’s commercial mortgage market, where lending rates have been pushed substantially higher as institutions’ cost of funds has risen in step with the policy rate.

Property buyers entering the market in September 2022 face a mortgage rate environment that is materially more expensive than a year earlier. Commercial mortgages are priced in a range that reflects both the elevated policy rate and the uncertainty premium that lenders apply in a rapidly shifting rate environment. The NHT’s subsidised rates — unchanged at 0, 2, and 4 per cent — have become proportionally more valuable as the commercial market has repriced, and contributor eligibility has become an even more strategically important asset for housing market participants.

Hurricane Season and the Caribbean Housing Market

September is the statistical peak of the Atlantic hurricane season, and 2022 has provided no shortage of tropical weather activity. While Jamaica was not directly impacted by major storm activity through September, the region faced significant threats. Hurricane Ian formed in late September, causing devastating damage in western Cuba and south-west Florida before making landfall as one of the most powerful storms to strike the continental United States in recent decades. The proximity of major storm events to Jamaica’s tourism markets in Florida and the disruption to Caribbean travel routes serves as a reminder of the hurricane risk that is permanently embedded in Jamaica’s geographic and economic context.

For the property market, hurricane risk has implications for insurance costs — a component of the total cost of homeownership that has been increasing across the Caribbean as reinsurers reprice exposure in the region. Property buyers, particularly in coastal and low-lying areas, should ensure that insurance costs are factored into total affordability calculations, as these costs have risen materially in recent years and may continue to do so.

Looking Ahead

The US Federal Reserve’s November 1 to 2 meeting is the next major monetary policy event. Given the Fed’s September projections pointing to a terminal rate above 4.50 per cent, a further 75 basis point increment in November is widely anticipated. The UK’s fiscal situation remains unresolved and will continue to generate market volatility as the Truss government navigates its options. Globally, the energy crisis in Europe — with natural gas prices at extreme levels as Russia curtails supply — sustains inflationary pressure across the global economy.

For Jamaica, the BOJ’s upcoming MPC meeting will provide the next domestic monetary policy signal. The trajectory of Jamaica’s CPI data through the fourth quarter will be critical — any signs of deceleration would be welcomed by a market hoping for an eventual peak in the tightening cycle. For property buyers, the near-term environment remains challenging from a commercial mortgage perspective, and NHT access continues to be the most effective buffer against the rate cycle’s impact on affordability.

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.

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