Caribbean Housing Affordability at Crisis Point as Mortgage Rates Soar in 2023 — February 2023

Publication Date: 3 February 2023  |  Coverage Period: 3 January – 2 February 2023

Morning Briefing

• US Federal Reserve raises rates to 4.5–4.75%: The Federal Reserve’s February 2023 meeting delivered a further 25 basis point increase, bringing the target rate to 4.5–4.75% — the highest level since 2007 — with Chair Powell signalling additional hikes remain likely as inflation remains above the 2% target.
• Jamaica commercial mortgage rates breach 12%: Major Jamaican commercial banks raised their base mortgage rates to 11.5–13.5% in January 2023, reflecting the elevated global rate environment and placing new mortgage loans well beyond the reach of median-income Jamaican households.
• NHT mortgage approvals up 8% despite rate pressure: Jamaica’s National Housing Trust reported an 8% increase in mortgage approvals in Q4 2022 compared to Q4 2021, driven by members seeking to access NHT rates before commercial bank rates rose further.
• Dominican Republic construction continues at pace: Despite higher financing costs, the DR’s construction sector grew 5.8% in 2022, with government infrastructure projects and tourism-linked private development sustaining activity even as residential mortgage volumes showed signs of slowing.
• Barbados first-time buyer scheme under review: The Barbados government announced a comprehensive review of its first-time buyer support mechanisms, acknowledging that rising commercial mortgage rates have significantly eroded the affordability gains achieved by previous housing assistance programmes.
• Cayman Islands property market holds premium: Despite global rate headwinds, Grand Cayman residential property prices held steady in Q4 2022, with the island’s strong financial sector employment and limited land supply maintaining a structural floor under values.

The Global Rate Shock and Caribbean Mortgages

When the US Federal Reserve began raising interest rates in March 2022 — the first increase in the post-pandemic hiking cycle — the implications for Caribbean mortgage markets were immediately apparent to analysts, if not yet visible in loan pricing. By February 2023, with the Federal Funds Rate at 4.5–4.75% and signalling further increases to come, the full force of the global rate shock has been transmitted into Caribbean commercial lending markets with considerable force.

Most Caribbean commercial banks operate with substantial exposure to US dollar funding markets, either through direct dollar-denominated borrowing or through the broader relationship between regional and US interest rate cycles. Jamaica’s commercial banks have raised base lending rates by approximately 400–500 basis points since the start of the hiking cycle, mirroring the Fed’s actions with some lag. The result is mortgage rates in the 11.5–13.5% range for new borrowers in the commercial banking system — a profound affordability shock for households whose incomes have not kept pace with either inflation or the cost of borrowing.

The arithmetic of housing affordability at these rates is sobering. A J$10 million mortgage at 13% over 25 years requires a monthly payment of approximately J$113,000 — a sum that represents more than 70% of median Jamaican household income. Even at the lower end of commercial rates, a J$6 million mortgage at 11.5% over 20 years demands around J$63,000 per month, still well above what a median-income household can sustain according to standard debt-service ratio guidelines. The practical effect is that commercial mortgage finance has become inaccessible to the majority of Jamaican households — a situation that represents both a social challenge and a significant market structural constraint on the volume of residential property transactions.

In Trinidad and Tobago, the situation is somewhat better: the country’s historically lower inflation and the government’s use of energy revenues to subsidise certain consumer costs have kept commercial mortgage rates below their Jamaican equivalents, with most major banks pricing at 8–10% for qualified borrowers. However, even at these rates, the affordability position for median-income T&T households has deteriorated materially from the low-rate environment of 2020–2021, and the pipeline of affordable housing applicants far exceeds available supply.

National Housing Trust: The Last Line of Affordable Finance

Against the backdrop of soaring commercial rates, Jamaica’s National Housing Trust has become more critical than ever as a provider of accessible mortgage finance. The NHT’s concessional rate structure — which offers mortgages at 7–9% for qualifying contributor members, depending on income level and benefit type — stands in increasingly sharp contrast to commercial bank pricing and represents in many cases the only financially viable pathway to homeownership for Jamaica’s formal-sector workers.

The NHT operates through mandatory contributions of 5% of insurable earnings from employees and 3% from employers on behalf of those employees. Approximately 30% of Jamaica’s formal workforce contributes to the scheme, with around 125,000 active mortgage accounts at any given time. The Trust’s ability to offer rates well below market is underpinned by its statutory funding model: contributions flow in continuously and the Trust’s investment income on its asset base subsidises the below-market mortgage lending. This model has worked well in periods of moderate commercial rates but comes under increasing pressure when the rate differential between NHT and commercial lending widens to 4–6 percentage points, as is currently the case.

The surge in NHT mortgage approvals in Q4 2022 reflects a rational response by contributors who recognise that locking in NHT rates now, before the Trust potentially responds to the higher rate environment with its own adjustments, is financially advantageous. NHT leadership has resisted pressure to increase mortgage rates sharply, conscious of the social mission of the institution, but the Trust’s financial sustainability under a prolonged high-rate environment is a question that housing policy specialists are beginning to examine with greater scrutiny.

Beyond Jamaica, equivalent institutions across the Caribbean are facing similar pressures. Barbados’s National Housing Corporation and Trinidad and Tobago’s Housing Development Corporation both offer subsidised housing at below-market prices, but the capacity of these schemes is dwarfed by the scale of unmet demand. The waiting lists for affordable housing across the region are measured in years, not months, even in the best of times — and the current affordability crisis is generating additional applicants at a pace that existing schemes cannot absorb.

First-Time Buyers: Squeezed from Every Direction

First-time buyers across the Caribbean are experiencing an affordability crisis of unusual severity. The combination of elevated property prices — which rose substantially during the pandemic period as construction costs surged and supply was constrained — and historically high mortgage rates creates a cost of homeownership that has moved beyond the reach of a growing proportion of Caribbean households who would historically have been able to purchase.

In Jamaica, the problem is most acute in the Kingston Metropolitan Area, where land prices and construction costs are highest and the gap between what households can afford and what properties cost is widest. A modest two-bedroom house in a middle-class Kingston suburb — Portmore, Red Hills, Havendale — is priced in the J$18–25 million range. With a 10% deposit requirement of J$1.8–2.5 million, a household needs to have accumulated a deposit equivalent to 12–18 months of median household income before they can even begin to qualify for a mortgage. For many young families, this is simply unachievable within a reasonable timeframe without family support.

Deposit accumulation is made harder by the same inflation that is driving mortgage rates higher. A household trying to save for a deposit faces the double bind of needing to accumulate more money (as property prices have risen) while their purchasing power is being eroded by food and fuel inflation. Real wage growth across the Caribbean has been negative in inflation-adjusted terms for most of 2022, meaning that the gap between what households can save and what they need to buy a home is widening, not narrowing.

Barbados’s review of its first-time buyer support mechanisms is a recognition that the policy tools developed in a lower-rate, lower-inflation environment are inadequate for current conditions. Effective first-time buyer support in the present environment requires either direct grant assistance for deposits, interest rate subsidies that can bridge the gap between commercial rates and affordable levels, or some combination of both. The fiscal cost of such interventions is significant, particularly for smaller Caribbean economies with limited fiscal space, but the social cost of an entire generation being locked out of homeownership is potentially greater.

Dominican Republic: Relative Resilience in a High-Rate World

The Dominican Republic’s construction sector growth of 5.8% in 2022 stands as a notable achievement in the context of global rate increases and inflation. The DR’s mortgage market operates somewhat differently from English-speaking Caribbean countries: a larger proportion of housing production is delivered through the government’s low-income housing programmes (which are not interest-rate sensitive in the same way), and the tourism-linked construction sector — hotels, branded residential communities, second homes — is financed primarily through international capital rather than domestic mortgage lending.

This structural difference gives the DR’s construction sector a degree of insulation from Caribbean commercial rate increases. The tourists and international investors buying into Cap Cana, Punta Cana and Bavaro developments are typically financing purchases through non-Dominican banking channels — US home equity lines, European portfolio lending or cash — rather than through DR commercial banks. The local residential market in Santo Domingo and Santiago is more directly affected by rate increases, and there are signs of softening in transaction volumes in the mid-market segment, though values have held relatively firm.

Caribbean Leaders This Month

Jamaica’s National Housing Trust stands out as the most important institutional actor in the Caribbean’s housing affordability landscape, with its 8% increase in Q4 2022 approvals demonstrating the critical role of concessional mortgage finance when commercial rates are prohibitive. The NHT’s continued commitment to below-market rates is the single most important housing policy action in the region.

Dominican Republic continues to demonstrate structural resilience in its construction sector, with the combination of government programme delivery and tourism-linked international investment providing a buffer against domestic rate pressures that English-speaking Caribbean markets lack.

Barbados earns recognition for its government’s honest acknowledgment that existing first-time buyer programmes are inadequate for current conditions and its commitment to a policy review. Recognising a problem is the first step toward solving it.

Trinidad and Tobago benefits from its energy revenue-derived capacity to maintain HDC affordable housing programmes at a scale and price point that smaller economies cannot match, providing relative protection for T&T households against the worst affordability pressures.

Cayman Islands demonstrates that in markets with strong underlying fundamentals — deep financial sector employment, absolute land scarcity, wealthy resident population — property values can hold firm even in significantly higher rate environments. The Cayman market is a useful indicator that rate increases alone are not sufficient to cause corrections where structural demand is strongest.

Belize saw increased interest from North American second-home buyers attracted by the country’s US dollar-pegged currency, English-language common law system, and significantly lower property prices than comparable Caribbean destinations. While facing similar construction cost pressures, Belize’s relative value proposition is attracting buyers priced out of more expensive markets.

St Kitts and Nevis reported continued strong interest in its Citizenship by Investment programme’s real estate track, with global uncertainty driving demand for alternative citizenship from buyers who see Caribbean CBI as both a property investment and a travel and residency hedge.

Guyana continues to face the paradox of an oil-rich economy with a housing affordability crisis: Georgetown property prices have risen dramatically with the oil boom, but the benefits of that boom are not yet broadly distributed. The gap between oil sector incomes and national median incomes creates extreme affordability disparities within the capital city property market.

Overall regional performer this month: Jamaica’s National Housing Trust, whose continued operation of concessional mortgage finance in the face of extraordinary commercial rate pressure represents the most important single contribution to Caribbean housing affordability in the current period.

Looking Ahead

The US Federal Reserve’s signalling of further rate increases in 2023 means that the commercial mortgage affordability crisis is likely to deepen before it improves. Most market forecasters expect the Fed to reach a terminal rate of around 5–5.25% before pausing, which would imply further Caribbean commercial mortgage rate increases of 25–50 basis points over the coming months. The critical question is when the Fed will begin cutting — a decision that most analysts do not expect before late 2023 at the earliest.

Caribbean governments will need to confront the policy reality that waiting for global rates to normalise is not a sufficient response to the housing crisis. The generation of Caribbean millennials currently in household formation — the natural cohort of first-time buyers — will not wait indefinitely for commercial rates to become affordable. Some will delay household formation, extending family living arrangements well beyond the point that previous generations experienced. Others will shift from homeownership aspiration to long-term rental expectation, a shift that has profound implications for Caribbean housing policy if it becomes embedded as a demographic norm.

The development banks — IDB, CDB and others — have a crucial role to play in providing concessional capital that can bridge the affordability gap while commercial rates remain elevated. The pace at which these institutions can deploy capital into Caribbean affordable housing programmes will be one of the most consequential determinants of the region’s housing market trajectory over the next 12–24 months.

The Caribbean Property & Investment Review is published monthly and covers developments during the preceding calendar month. All factual statements reflect information publicly available at the time of publication.