Jamaica’s Economy Contracts Again. What It Means for Property.

Kingston, Jamaica — 1 March 2012

Jamaica’s economy has contracted for the fourth time in five years. GDP growth has averaged less than one and a half per cent since 1999, and the two years of recovery that followed the initial post-crisis slump have given way to another contraction. The conditions are difficult in ways that go well beyond the property sector: unemployment is elevated, wages are stagnant, inflation has eroded real household purchasing power, and the fiscal pressures of a debt-to-GDP ratio that at its peak exceeded one hundred and forty-seven per cent have severely limited the government’s room for manoeuvre. Against that backdrop, the outlook for Jamaica’s housing market is cautious.

What Recession Does to Homebuyers

Recessions damage housing markets through several channels. Employment insecurity makes potential buyers reluctant to commit to long-term mortgage obligations. Income falls reduce what households can afford to borrow. Banks tighten lending standards in response to rising credit risk, reducing the pool of qualifying borrowers. And the confidence effect, the sense of optimism about the future that drives many property purchase decisions, is depleted by the cumulative experience of an economy that has repeatedly disappointed. In Jamaica’s case, all of these channels have been operating simultaneously, and their combined effect has been to take the buoyancy out of a market that had shown genuine momentum in 2010 and 2011.

Mortgage rates at building societies, still the most accessible commercial mortgage products for Jamaican borrowers, declined from twelve and a half per cent in 2010 to around eleven per cent in 2011 and around ten per cent in 2012. That gradual improvement in commercial borrowing costs represents a genuine improvement in affordability at the margin, but it is not sufficient to compensate for the income pressure and confidence weakness that the economic contraction has imposed. The NHT continues to lend at its subsidised rates, providing a degree of insulation for the affordable segment that pure commercial market conditions would not have sustained.

The Resilience Factor

Jamaica’s property market has a structural resilience that prevents it from collapsing even in periods of economic difficulty. The housing deficit is real and large enough to sustain demand even when confidence is low. Sellers who do not have to sell do not sell, limiting the volume of distressed transactions that would pull reference prices down. The NHT’s continued lending activity means the most affordable segment of the market retains an institutional buyer that does not exit in downturns the way purely commercial demand does. And cultural factors, the deep attachment to land and property as security, identity, and generational aspiration, mean the motivation to own does not disappear in difficult times even when the practical ability to proceed is constrained.

IMF, Reform, and What Comes Next

The IMF programme that Jamaica is pursuing in this period, aimed at placing the debt-to-GDP ratio on a sustainable downward path through fiscal consolidation, creates constraints on the government’s ability to stimulate the economy through expenditure. But it also, if successful, creates the conditions for a lower interest rate environment, more stable inflation, and eventually a stronger growth trajectory. A property market that is patient through the consolidation phase stands to benefit significantly from the macro environment that a successful fiscal programme eventually enables. The question is how long that patience must last, and how much of the housing investment that is deferred through this period will eventually come through when conditions improve.

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