Jamaica Real Estate Roundup — Q4 2022: The Peak

• BOJ raises to 7.00% in November — 650bps above the 2021 floor.
• Annual inflation closes 2022 at 10.35% — above target all year.
• Tourism sets a new record: 3.3 million arrivals, US$3.6 billion earned.
• RAJ transactions decline to 1,608 worth J$108B from 2021’s J$211B.
• 5,135 units approved in 2022; construction cost pressure mounts.

The fourth quarter of 2022 was, in retrospect, the moment at which Jamaica’s property market made its decisive turn from boom to consolidation. It was not a sudden reversal; the signals had been accumulating through the year in the data — in the rising rate environment, in the construction cost pressures that had tested project economics, in the transaction volumes that were declining from the extraordinary highs of 2021. But the Bank of Jamaica’s decision on November 21 to raise the overnight policy rate by a further 50 basis points to 7.00 per cent per annum, bringing the cumulative tightening since October 2021 to 650 basis points, gave the consolidation its most definitive punctuation mark. The BOJ had moved from 0.50 per cent to 7.00 per cent in thirteen months. Jamaica’s property market was navigating the consequences.

The November 2022 decision was followed by a December meeting at which the Monetary Policy Committee held the rate at 7.00 per cent, indicating that the tightening cycle had likely reached its terminal point. Inflation at November 2022 had been reported at 10.3 per cent — within the BOJ’s forecast range of 9.5 to 10.5 per cent for the period — and the Bank’s projection was that it would begin declining toward the four-to-six per cent target over the course of 2023. The December hold was a pivot: from an institution that had been raising rates aggressively and consistently to one that was now watching, waiting and monitoring the incoming data to determine when and how to begin the reverse journey. The market understood the message.

The Realtors Association of Jamaica’s year-end data for 2022 — 1,608 transactions across its affiliated agents’ channels, worth approximately J$108 billion — told the story of a market that had moved significantly from the extraordinary conditions of 2021. The previous year had seen 1,858 transactions generating approximately J$211 billion — a boom driven by pandemic-era demand, low interest rates, diaspora investment and the pent-up energy of a population that had reconfigured its relationship with home and space during the restrictions of 2020. The 2022 decline in both volume and value was real but contextually rational: it represented the market finding a more sustainable level after a demand surge that could not, by its nature, be sustained indefinitely. The decline was a normalisation, not a crash.

A Record Year for Tourism — and Its Property Implications

Against the residential market’s cooling and the commercial uncertainty that rising rates produced, Jamaica’s tourism sector was closing 2022 with the most emphatic annual performance in its history. More than 3.3 million visitor arrivals — more than double the 2021 figure of 1.54 million and surpassing Jamaica’s own pre-pandemic record from 2019 — had entered the island through its airports and seaports across the year. Gross foreign exchange earnings from the sector reached over US$3.6 billion, representing a 71.4 per cent increase over 2021 and placing Jamaica on par with its strongest-ever tourism year in nominal earning terms. In a year when the broader economy was navigating the dual pressure of rising rates and sustained inflation, tourism’s performance was a genuine source of economic strength that was visible in the employment data, in the foreign exchange reserves, and in the commercial activity of the resort towns and their surrounding communities.

The implications for the property market were direct and material. Hotel and resort investment, whose business case depends on sustained visitor demand, was validated by 2022’s performance in a way that strengthened the case for continued capital commitment to Jamaica’s hospitality sector. The major projects advancing in Montego Bay — the accumulating pipeline of hotel development that was reshaping the resort city’s commercial landscape — entered 2023 with the evidence of 3.3 million annual visitors behind them, a demand foundation that made the patient capital required for large-scale hospitality development easier to attract and justify. The adjacent residential markets in St James and St Ann were absorbing the employment and income effects of the tourism boom in ways visible in rental demand, in retail activity and in the continuing interest from tourism workers and hospitality professionals in property ownership in the resort corridor.

Development Activity: The High-Water Mark

The Real Estate Board of Jamaica’s 2022 approval data — 98 approved residential and commercial developments encompassing 5,135 units — represented what would, in retrospect, be the high-water mark of the post-pandemic development cycle. The 5,135 units approved in 2022 were the product of developer confidence formed in the optimistic conditions of 2021 and the early months of 2022, before the full force of the tightening cycle had modified project economics. Schemes that had been conceived when financing was available at two or three per cent, when construction cost expectations were pre-supply-chain-crisis, and when pre-sales velocities were at their pandemic-era peak were now advancing through approvals in a financial environment significantly less hospitable than the one in which they had been planned.

The NHT’s 2022-23 fiscal year data confirmed a challenging delivery environment. The Trust completed 1,546 housing solutions in the year — a figure that was 42 per cent or 1,121 solutions fewer than the prior year’s completions, reflecting the construction cost and contractor availability pressures that were affecting all supply-side actors in the market. The Trust’s lending portfolio continued to grow, with loans receivable reaching J$277.4 billion by the end of the fiscal year, but the pace of physical delivery was under pressure from the same cost environment that was constraining private development.

Construction costs in Q4 2022 remained elevated in ways that complicated project economics for developers attempting to price their completions into a market where buyer affordability was simultaneously being squeezed by rising mortgage rates. The cost of steel, cement, aggregates, timber and finishing materials had all moved sharply through 2022, driven by the combination of global supply chain disruption, the Russia-Ukraine war’s effects on commodity markets and the sustained demand pressure from the construction activity that had been launched in the 2021 boom. Carib Cement had met strong demand through the year, but input cost pressures were visible across the building materials supply chain. The developer who had priced a project in early 2022 was, by Q4, managing a gap between original and current cost that was testing the viability of schemes that had seemed straightforwardly attractive a year earlier.

Residential Market: Affordability in Focus

The residential sales market in Q4 2022 was experiencing what would become the dominant condition of the following year: the affordability squeeze produced by the intersection of higher mortgage rates and higher nominal property values. The Jamaica Mortgage Bank’s data that residential prices had risen 17 to 25 per cent since the pandemic baseline was not yet fully in the public domain, but the direction of travel was unmistakeable in the anecdotal evidence from estate agents and mortgage lenders. The buyer who had been pre-qualified for a mortgage of a given amount in early 2021 — when rates were at historical lows — found themselves qualifying for significantly less by Q4 2022, even with the same income profile and the same nominal property value in mind. The market had moved against them on both dimensions simultaneously.

The rental market’s response was, characteristically, the inverse. Households that could not qualify for mortgages at current rates remained renters, sustaining demand for rental accommodation in a market where new supply was constrained. Landlords in Kingston and St Andrew entered the new year with full occupancy, elevated rents and the prospect of a rental environment that the rate cycle had, inadvertently, made more commercially attractive for property owners than at any recent point. The hold-and-rent strategy that savvy investors had adopted during the pandemic — buying or retaining property at low acquisition costs or low historic debt service and renting at market-premium rates in the elevated environment of 2021 and 2022 — was, through Q4 2022, continuing to produce strong returns.

Hurricane Ian: A Near Miss for Jamaica

The 2022 Atlantic hurricane season had included one significant near miss for Jamaica. Hurricane Ian, which would go on to make catastrophic landfall in Florida as a major hurricane in late September, passed to the west of the island on September 26 as an intensifying tropical storm. Jamaica experienced minor flooding in some coastal and low-lying areas, with damage estimates of approximately US$5.86 million — significant at the individual household level but not material at the macro scale. The island’s emergency management systems performed well, and recovery from the minor impacts was rapid. Ian’s trajectory — which brought it through the Yucatan Channel and into the Gulf of Mexico rather than directly over Jamaica — was one of the more consequential pieces of meteorological geography for the island’s tourism and property sectors in 2022, sparing the destination the kind of disruption and damage that a direct hit at Ian’s eventual peak intensity would have caused.

The Economic Context

Jamaica’s economy in 2022 had grown at approximately 5.2 per cent for the calendar year — a strong performance set against the global context of rising rates, energy price shocks and the Russia-Ukraine war’s supply chain effects. The fiscal 2021/22 performance, which the PIOJ had reported at +8.1 per cent, had set a high baseline from which 2022’s growth, while strong, represented a return toward trend. The construction sector’s contribution had been positive through the period of peak pipeline activity, and the services sector — led by tourism, business services and financial services — had provided the growth engine that kept headline figures positive even as the monetary tightening took effect in the rate-sensitive sectors of the economy.

Outlook for 2023

Jamaica’s property market enters 2023 in a state of managed deceleration. The conditions that defined 2020 and 2021 — ultra-low rates, pandemic-driven demand, diaspora investment, the discovery or rediscovery of Jamaica as a place to live rather than simply to visit — have moderated, replaced by the more challenging arithmetic of a 7.00 per cent policy rate, 10 per cent inflation and a construction cost environment that compresses developer margins and inflates the asking prices of completed product. The market has cooled. It has not broken.

The year ahead will be determined by the pace at which inflation descends to the BOJ’s target band and the timing of the monetary easing that will follow. The 2022 data — 1,608 transactions, J$108 billion — is the new baseline from which 2023 will be measured. A year in which inflation falls faster than expected, in which the BOJ begins its easing cycle earlier than the market has priced, or in which new government housing initiatives accelerate affordable supply could produce a better outcome than the cautious consensus expects. A year in which inflation proves stickier, the global rate environment more persistent or construction costs more resistant to normalisation will extend the period of subdued activity. On the first day of 2023, the market is patient, watchful, and waiting for the data that will tell it which story 2023 will tell.