Post-NDX Reckoning: Budget Season Tests Jamaica’s Housing Commitments — April 2013

Publication Date: 3 April 2013 | Coverage Period: 3 March – 2 April 2013 | Category: Monthly Review

Month in Brief

• Budget 2013/14 presented; NHT transfer to Consolidated Fund confirmed despite parliamentary opposition.
• Housing targets for 2013/14 presented in Sectoral Debate; NHT construction programme maintained.
• IMF pre-programme conditions advancing; staff-level agreement broadly in place post-NDX.
• BOJ signals first modest rate easing move as NDX fiscal savings begin feeding through.
• Private sector developer confidence improving; several Kingston and St. Andrew schemes advance.
• Catherine Estates, Bernard Lodge: HAJ finalises environmental approvals ahead of construction start.

Housing Market Conditions

The month of March brought Jamaica’s budget debate to the foreground, and the housing sector features prominently in both the fiscal arithmetic and the political theatre that surrounds it each year. The first full month since the NDX settlement has seen a perceptible, if modest, improvement in market sentiment. Developers are beginning to re-engage with project financing conversations; buyers are more willing to initiate serious discussions; and the rental market, while still firm, is seeing slightly less frenetic demand as some households begin to reconsider the timing of their homeownership decisions.

Property transaction volumes in March remained thin by historical standards. Kingston and St. Andrew continue to account for the bulk of formal market activity, with Portmore — St. Catherine’s sprawling dormitory town — accounting for significant NHT-financed volumes. Asking prices in the middle and upper segments are beginning to stabilise after months of soft drift; sellers who had been holding out at 2011 price levels are, in some cases, adjusting to market reality.

The NHT continues to be the market’s engine. The Trust’s contributor loan disbursements proceed on schedule, with the new financial year (beginning April 1) bringing the reset of annual loan disbursement targets and a fresh cycle of balloting for eligible contributors. The queue of qualified contributors awaiting solutions remains long across all parishes, a structural feature that reflects both the Trust’s success in attracting contributors and the chronic undersupply of affordable housing solutions.

Budget 2013/14: Housing Allocations

The presentation of Budget 2013/14 by Finance Minister Dr Peter Phillips has confirmed the fiscal framework within which housing policy must operate for the coming year. The overall budget remains tight, with the primary surplus target maintained at a demanding level consistent with the fiscal path agreed with the IMF’s staff mission. Capital expenditure across government has been held firm, and housing ministry allocations are broadly unchanged in nominal terms from 2012/13 — implying a real-terms reduction after inflation.

The NHT transfer to the Consolidated Fund has been confirmed in the budget as planned. This has drawn sustained criticism from the JLP opposition and from NHT contributor advocacy groups, who argue that the transfer directly reduces the Trust’s capacity to fund new housing solutions. The government maintains that fiscal stabilisation — of which the NHT transfer is one component — is the precondition for the lower mortgage rates that will ultimately make housing more accessible to Jamaicans. The political argument runs on both sides, but the fiscal logic of the budget has prevailed.

In the Sectoral Debate, the Minister with responsibility for housing presented targets for 2013/14 that include continued NHT lending at approximately the prior year’s pace, HAJ project completions in several parishes, and ongoing progress under the National Land Titling Programme. The targets are consistent with maintaining the current level of formal housing output rather than accelerating it — a position that housing sector advocates regard as inadequate relative to the scale of the deficit but that is defensible within the fiscal constraints.

Bank of Jamaica: Easing Begins

The Bank of Jamaica has signalled that a gradual easing of monetary policy is now possible in the post-NDX environment. The NDX’s reduction in the government’s domestic borrowing requirement — and the consequent reduction in the sovereign’s demand for domestic capital at high rates — creates the space for the central bank to lower its policy rate without triggering the capital flight that would previously have been a risk. The first modest move in the policy rate is anticipated within the current quarter, conditional on inflation and exchange rate stability.

For commercial mortgage lenders, this signals a change in the medium-term rate environment. Building societies and commercial banks will not immediately reprice their mortgage books — the process of balance sheet adjustment and competitive repricing takes time — but the direction is now unambiguously towards lower rates. Mortgage borrowers taking on new debt in the second half of 2013 may find themselves at the beginning of a declining-rate cycle that was simply not available in the period from 2010 to 2012.

Construction Activity

Construction activity is stirring after several months of near-paralysis. The combination of the NDX resolution, improving macro confidence, and the beginning of the new financial year — which typically sees the release of public capital expenditure — is providing a modest fillip to the sector.

HAJ’s Catherine Estates project in Bernard Lodge, St. Catherine, has completed its environmental permitting stage and is expected to proceed to construction in the coming months. The scheme, which will provide several hundred housing solutions for lower-income NHT contributors, represents one of the more significant social housing starts in recent years. Its location in St. Catherine reflects the parish’s importance as a housing absorption zone for Kingston’s overflow population.

The Whitehall Phase 3 project in Negril, Westmoreland, which broke ground earlier in the year, is progressing on schedule. The 590-unit scheme is the most significant housing development the western parishes have seen from government programmes in some time and addresses a long-standing inequity in the geographic distribution of formal housing output.

Private sector activity is picking up marginally. Several small to medium schemes in upper St. Andrew and St. James are at the financing stage, with developers anticipating that the improving rate environment will translate into better terms over the coming year. The pipeline is thin but moving, a notable improvement from the stasis of the preceding months.

IMF Programme Status

With the NDX completed and the budget presented, the remaining conditions for a formal IMF Extended Fund Facility are believed to be largely in place. The IMF’s staff mission has been in close engagement with Jamaican authorities; a staff-level agreement on the key elements of the programme has been broadly reached, and submission to the IMF Executive Board is expected in the coming weeks. The programme, which is understood to involve a facility of approximately US$900–950 million, will formalise the fiscal path that Jamaica has been following since early 2012 and provide external balance of payments support.

From a housing sector perspective, the IMF programme’s significance is primarily signalling: it confirms to markets, rating agencies, and international investors that Jamaica’s fiscal adjustment is durable and externally validated. This signal is expected to further compress sovereign risk premiums and, over time, to support the decline in commercial lending rates that will make mortgage finance more accessible.

Diaspora and Remittances

Bank of Jamaica data confirms that remittance flows in 2012 maintained their level above US$1.9 billion, consistent with the prior year. The first-quarter 2013 data, when available, is expected to show continued resilience. For Jamaica’s housing market, remittance flows remain a crucial source of construction financing — particularly for the informal self-build sector in rural parishes — and their stability provides an important buffer against the weakness in domestic formal investment.

Diaspora interest in formal Jamaican property investment is beginning to recover from the caution that characterised late 2012 and early 2013. The NDX resolution and the improving macro outlook have reduced the uncertainty premium that was deterring diaspora buyers. Inquiries from the United States and United Kingdom markets, particularly for properties in the tourism corridor and in the Kingston residential market, have increased modestly through the first quarter.

Affordability Analysis

The affordability picture is beginning to shift — marginally but meaningfully — in the direction of improvement. Commercial mortgage rates have not yet declined, but the expectation of future rate reductions is changing the calculus for buyers and developers alike. Households that were unwilling to commit to a 20-year mortgage at 13% may reconsider once rates approach 10–11%, a level that the BOJ easing trajectory suggests is achievable within 12–18 months if the macro stabilisation holds.

The NHT remains the critical vehicle for the majority of Jamaican homebuyers who cannot access commercial mortgage finance. The Trust’s loan limits — approximately J$4.5 million for individual contributors — remain unchanged, and pressure is building from contributor groups for an increase in line with construction cost inflation. This is a live policy debate that the new financial year’s NHT board will need to address.

Regional Context

Jamaica’s fiscal adjustment experience continues to attract regional attention. The Caribbean Development Bank has cited Jamaica’s NDX as a model for addressing unsustainable domestic debt burdens without resorting to outright default. Several OECS members are watching the Jamaica programme as a potential template for their own fiscal challenges, though the specific institutions and political economy of smaller island states differ significantly.

Looking Ahead

The coming weeks are expected to bring the formal conclusion of the IMF programme negotiations, which will mark the completion of the macro stabilisation framework that has been under construction since early 2012. For the housing sector, April 2013 marks the beginning of a new financial year — and the first year in which the post-NDX interest rate environment could begin translating into lower mortgage costs for Jamaican borrowers.

The pace of that translation will depend on the Bank of Jamaica’s easing trajectory, on competitive dynamics among commercial lenders, and on the degree to which improving macro conditions boost developer and buyer confidence. If these factors align favourably, the second half of 2013 could see the first genuine stirrings of a housing market recovery that has been deferred for several years. That recovery, when it comes, will need to be both broad and sustained to begin making a dent in a housing deficit that has accumulated over decades of chronic underinvestment.

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