Publication date: 5 June 2023 | Covering: May 2023
Monthly Briefing
- BOJ overnight rate holds at 7.00 per cent; inflation declining but above 4–6 per cent target
- US Federal Reserve raises to 5.00–5.25 per cent on May 3; June pause increasingly anticipated
- NHT July 1, 2023 reforms approaching: J$7.5 million limit, new 5 per cent band in under four weeks
- Current NHT framework: J$6.5 million individual limit; 0, 2, 4 per cent rate bands in effect
- Commercial mortgage rates 8–12 per cent; affordability under sustained pressure
- Jamaica inflation in 7–8 per cent range; deceleration from 2022 double-digit peak progressing
BOJ Holds at 7.00 Per Cent: The Long Restrictive Plateau
The Bank of Jamaica’s overnight policy rate remains at 7.00 per cent per annum as Jamaica enters the second half of 2023’s first quarter. The rate was established at its current level in November 2022, following the conclusion of a tightening cycle that brought the BOJ’s overnight rate from 0.50 per cent in late 2021 to 7.00 per cent. The Bank has maintained this level through six Monetary Policy Committee meetings, resisting the pressure for early easing that has come from segments of the commercial mortgage market and from property developers who have seen project costs and affordability pressured by the combination of elevated rates and rising construction costs.
Jamaica’s inflation for April and May 2023 has continued to show the deceleration that the BOJ’s sustained tight stance has helped to engineer. Point-to-point CPI readings in the 7 to 8 per cent range represent a meaningful improvement from the 10 to 12 per cent readings seen at the commodity shock’s 2022 peak. The trend is clearly downward, driven by the combination of moderating global commodity prices and the base effects of the high readings from mid-2022 gradually dropping out of the annual comparison. The BOJ’s own projections expect the deceleration to continue, with the 4.0 to 6.0 per cent target range expected to be reached in 2024.
For Jamaica’s commercial mortgage market, the sustained hold at 7.00 per cent means that the elevated borrowing cost environment of 2022 to 2023 continues. Rates of 8 to 12 per cent across the deposit-taking sector reflect both the BOJ’s policy rate and the cost of funds in a market that has not yet seen relief. Borrowers who took out variable rate mortgages in 2021 at lower rates have absorbed the accumulated impact of the BOJ’s tightening cycle. New borrowers entering the market face the current elevated rates in full, creating a meaningful affordability barrier relative to the standards of 2020 and 2021.
US Federal Reserve May Decision: The Tenth Consecutive Hike
The US Federal Reserve raised the federal funds rate by 25 basis points at its May 2 to 3 meeting, bringing the target range to 5.00 to 5.25 per cent from 4.75 to 5.00 per cent. This was the tenth consecutive rate increase in the tightening cycle that began in March 2022, and it brought the federal funds rate to its highest level since September 2007. Chair Jerome Powell’s post-meeting press conference was notably balanced: he acknowledged the cumulative tightening already delivered, cited progress on inflation, and introduced language suggesting the Committee was prepared to pause at the June meeting to assess the impact of the tightening so far — though without committing to a pause.
The June 13 to 14 FOMC meeting is now the immediate focus. Market pricing ahead of that meeting is broadly split between a hold and one more 25-basis-point hike, with events in the US banking sector — following the failures of Silicon Valley Bank and Signature Bank in March — adding complexity to the Committee’s assessment of credit conditions. A June hold would be the first pause in the current tightening cycle and would powerfully signal that the cycle is approaching its end, even if the terminal rate has not formally been declared. For Jamaica, a confirmed US rate pause in June would reduce the exchange rate risk associated with BOJ easing and would support the Jamaican dollar in the near term.
NHT July 1 Reforms: Less Than Four Weeks Away
The National Housing Trust’s landmark package of mortgage reforms, announced earlier in 2023, takes effect on 1 July 2023 — less than four weeks from the date of this review. For the many NHT contributors who have been waiting for the new, higher loan limits to come into effect before proceeding with property purchases, the July 1 date is now firmly within planning horizon. The reforms include the increase of the individual open market loan limit from J$6.5 million to J$7.5 million (and J$8.5 million for qualifying properties valued at J$12 million or less), the introduction of a new 5 per cent interest rate band for contributors earning above J$100,000 per week, and the elevation of multi-applicant ceilings to J$15 million for two contributors and J$21 million for three.
In the meantime, the current NHT framework remains in effect: the J$6.5 million individual limit, rate bands of 0, 2, and 4 per cent based on income, and multi-applicant ceilings of J$13 million and J$19.5 million for two and three contributors respectively. Contributors who are close to completing a property transaction may wish to assess whether proceeding before July 1 or waiting for the new limits makes more sense for their specific circumstances. For those whose target properties are priced just above J$6.5 million or in the J$7.5 to 8.5 million range, the new limits that take effect on July 1 are likely to make a meaningful difference to the terms on which they can access NHT finance.
Jamaica’s Inflation and the 2023 Trajectory
Jamaica’s headline inflation through the first five months of 2023 has followed the expected deceleration path. From the 7 to 9 per cent range in early 2023, point-to-point CPI has been declining gradually, with each successive month bringing the comparison base from 2022’s elevated readings. By May 2023, inflation in the 7 to 8 per cent range reflects the partial drop-out of the most acute commodity shock months from the annual calculation. As the second half of 2023 progresses, the base effects will continue to assist: the most elevated months of 2022 will gradually fall out of the twelve-month comparison, further reducing the arithmetic basis for high annual readings.
For the housing market, the practical significance of Jamaica’s inflation trajectory goes beyond its monetary policy implications. Elevated inflation erodes the real value of savings, making the accumulation of a mortgage deposit slower and harder for households that are not benefiting from real wage growth. Construction cost inflation has been a significant issue for developers, with imported building materials — steel, cement, fixtures, and fittings — all subject to the same global price pressures that have driven consumer inflation. Some easing of global commodity prices in 2023 has provided moderate relief, but construction costs remain elevated relative to the pre-pandemic baseline.
The Property Market in Mid-2023
Jamaica’s residential property market in mid-2023 is characterised by constrained commercial mortgage activity, resilient NHT-financed purchasing, and sustained investor and diaspora demand at the upper end of the market. The combination of high commercial mortgage rates and elevated property values has created an affordability gap that has suppressed first-time buyer participation relative to the market’s potential. However, the underlying demand — driven by household formation, the 150,000-unit structural deficit, and the deep cultural commitment to homeownership — has not diminished; it is being deferred rather than eliminated.
New development activity has continued across the price spectrum, with affordable townhouse and apartment developments in Portmore, Spanish Town, and suburban Kingston accounting for much of the new supply. In the premium segment, residential developments in established Kingston communities and the north coast resort corridor have continued to attract purchasers from both the domestic and diaspora markets. The June to September hurricane season, now beginning, will bring the usual seasonal slowdown in market activity, but underlying demand will re-emerge as the season passes.
Looking Ahead
The US Federal Reserve’s June 13 to 14 meeting is the next major event, and a pause in the hiking cycle — the first since March 2022 — is being priced as the more likely outcome. A confirmed pause would shift the global monetary narrative toward the question of when the cutting cycle begins, rather than how many more hikes remain. For Jamaica, this shift in narrative has beneficial implications for the exchange rate, the BOJ’s policy room, and the longer-term trajectory of commercial mortgage rates.
The approaching July 1 NHT reforms are the dominant near-term story for Jamaica’s affordable housing finance market. As the date approaches, contributors, agents, and developers are making their plans and calculations. The reformed framework will provide materially better access to affordable finance for a significant cohort of NHT contributors, and the market is positioned to respond positively when the new limits take effect in less than four weeks.
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.
Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomesnews Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com
Visit our YouTube Community ↗