Caribbean at Inflation Peak: Construction Costs Surge as Property Demand Holds Firm — September 2022

Publication Date: 3 September 2022  |  Coverage Period: 3 August – 2 September 2022

Morning Briefing

• US CPI inflation at near-peak 8.5% in July 2022: The latest US inflation data, released in August 2022, showed the Consumer Price Index at 8.5% year-on-year in July, below the June peak of 9.1% but still at levels last seen in the early 1980s, sustaining pressure on Caribbean import costs and the US Federal Reserve’s rate hiking trajectory.
• Caribbean construction costs hit 40-year high: A comprehensive survey of building material costs across CARICOM states conducted in August 2022 found prices for standard residential construction inputs — cement, steel, timber, PVC piping — running 30–50% above August 2020 levels, the most acute cost inflation the industry has experienced since at least the 1980s.
• Guyana real estate market sees 60% price surge: Georgetown property analysts reported that residential sale prices in prime Guyanese neighbourhoods had increased by approximately 55–65% since 2019, driven by oil sector income injection and a severe shortage of quality housing stock relative to the rapidly growing professional workforce in the capital.
• Jamaica diaspora remittances hit new record: The Bank of Jamaica reported that diaspora remittance inflows reached a new monthly record of US$318 million in July 2022, with a significant proportion directed toward housing construction and property purchase. Strong employment among the Jamaican diaspora in the US and UK is sustaining the inflow.
• Caribbean labour market tightening raises construction wages: Building industry associations across Jamaica, Barbados and Trinidad reported wage inflation of 10–18% for skilled construction trades in 2022, as the post-COVID tourism boom drew workers from construction into hospitality and pent-up demand for housing maintenance and renovation absorbed remaining skilled labour supply.
• Dominican Republic mortgage market volumes hold despite rate rises: The DR’s central bank reported that residential mortgage approvals in Q2 2022 were only 5% below the same period in 2021, suggesting that demand for homeownership in the DR remains relatively resilient despite a commercial rate environment that has risen with the global tide.

The Caribbean Inflation Peak: Understanding the Cost Spiral

August 2022 may be remembered as the month when Caribbean construction cost inflation reached its most acute point. The confluence of factors that have driven costs to 40-year highs represents a once-in-a-generation convergence of adverse supply and demand dynamics: pandemic-era global supply chain disruption, Russia’s invasion of Ukraine and its cascading effects on energy and commodity prices, post-pandemic demand surge as Caribbean economies reopened and tourism returned, and domestic labour market tightening as workers moved between sectors. Understanding these factors individually helps explain why the cost spiral has been so extreme and why a rapid reversal is unlikely.

The supply chain element of Caribbean construction cost inflation preceded the Ukraine war. The COVID-19 pandemic disrupted manufacturing in Asia, bottlenecked global shipping and created extraordinary demand variability across industries simultaneously. Steel manufacturing facilities that reduced capacity during pandemic lockdowns have not fully restored it; shipping container availability and freight rates only began to normalise in mid-2022 after reaching extraordinary levels in late 2021; and the semiconductor shortages affecting manufactured goods from appliances to construction equipment have added delays and costs throughout the construction process.

Russia’s invasion of Ukraine on 24 February 2022 overlaid this supply chain disruption with an energy price shock of historic proportions. The natural gas price spike in Europe — as the continent scrambled to reduce its dependence on Russian supply — translated into higher costs for energy-intensive manufacturing across the globe, including the steel, cement, aluminium and glass that Caribbean construction depends upon. The oil price spike to above US$120 per barrel in June 2022 added further cost pressure through higher freight and transportation costs, making every imported building material more expensive on arrival at a Caribbean port.

On the demand side, the post-pandemic Caribbean has simultaneously experienced a tourism boom that is creating extraordinary employment and income in hospitality — drawing workers who might otherwise be in construction — and a pent-up housing demand surge as households that deferred construction and renovation decisions during the pandemic moved to execute those plans in 2021–2022. The result has been a construction labour market with insufficient skilled workers to meet demand, driving wages up in the sector even as the cost of materials has also risen dramatically.

Demand Paradox: Why Caribbean Property Markets Haven’t Collapsed

The textbook prediction, given the combination of 30–50% construction cost increases, rising mortgage rates and peak inflation, would be a significant slowdown or correction in Caribbean property markets. The reality in August 2022 is more nuanced and, for investors, more interesting. Across most Caribbean markets, demand for property has remained strong despite these headwinds, driven by a set of structural factors that differ from the cyclical dynamics that drive most property markets.

Diaspora remittances represent the most powerful counter-cyclical demand driver in the Caribbean’s residential property market. Jamaica’s record US$318 million in monthly remittances illustrates the scale of this phenomenon. Jamaicans in the United States, United Kingdom and Canada are employed at unusually high rates in 2022, benefiting from the tight labour markets in those economies, and are directing a growing share of their earnings toward housing investment in Jamaica. These buyers — purchasing properties for family use, retirement planning or rental income — are transacting in hard currency and are therefore partially insulated from local mortgage rate increases. When a Jamaican in London is remitting sterling to fund construction of a family home in St Catherine, the Bank of England’s base rate matters more than the Bank of Jamaica’s policy rate.

The tourism boom has created a second demand engine: the short-term rental investor. Caribbean villa and apartment owners who are benefiting from extraordinary tourism demand — with occupancy rates and nightly rates both at or near record levels — are generating cash flows that justify further investment in property acquisition and improvement. The 30–50% yield increases that well-managed Caribbean short-term rental properties have achieved over the past 18 months are providing the financial rationale for continued property investment despite elevated purchase and construction costs.

International buyers seeking lifestyle and value in a world of rising costs have also maintained Caribbean property demand. For a buyer from the UK or continental Europe evaluating a Caribbean purchase against their home market alternatives, the Caribbean still represents relative value: a combination of climate, lifestyle and investment returns that is difficult to replicate domestically. The pound sterling and euro have depreciated against the US dollar in 2022, which has moderated the purchasing power of European buyers in US dollar-priced Caribbean markets, but this headwind has been insufficient to derail the overall trend of sustained international demand.

Guyana’s Real Estate Fever: Oil Wealth and Housing Shortage

The 55–65% increase in Georgetown prime residential property prices since 2019 is the most extreme property market movement in the Caribbean in 2022. Guyana’s oil production, growing steadily from the Stabroek Block under ExxonMobil’s development, has injected an entirely new category of high-income professional into the Guyanese economy: petroleum engineers, geophysicists, project managers, legal and financial professionals serving the energy sector, all of whom require quality housing in or near Georgetown. The local housing supply has not kept pace with this extraordinary demand, and the result is price appreciation of a magnitude and speed that is creating social tension and policy challenges for the Guyanese government.

The Guyanese construction industry, though growing rapidly, faces the same cost pressures as the rest of the Caribbean — but compounded by an additional challenge: the country’s construction infrastructure is not yet at the scale needed to deliver the volume of quality housing that market demand requires. Skilled construction workers are in short supply, and the importation of construction labour — as has been done for major energy infrastructure projects — creates logistical and social complications. The government is aware that failing to expand housing supply rapidly enough will create affordability problems that could undermine the social licence for the oil industry’s extraordinary growth.

For regional investors, the Guyana property market presents a compelling but complex opportunity. The upside case — oil production growing toward and beyond 500,000 bpd over the next several years, generating sustained income and employment that underpins property demand — is real and well-supported by ExxonMobil’s production projections. The risks — political risk associated with resource-wealth management, infrastructure gaps that constrain livability, and the vulnerability of resource-dependent economies to commodity price cycles — are equally real and must be weighed carefully.

Mortgage Markets Under Pressure: The Rate Reckoning

The US Federal Reserve’s rate-hiking cycle, now delivering its fourth consecutive meeting increase and having raised the target rate from near-zero in March 2022 to a range of 2.25–2.5% by August, is transmitting into Caribbean commercial mortgage markets with increasing force. Jamaica’s commercial banks, which had already begun raising lending rates in response to BOJ policy tightening, are now pricing new mortgage products at 9–11% for qualified borrowers — still manageable for upper-income purchasers but increasingly stretched for the middle market.

The contrast between commercial bank mortgage rates and NHT rates has never been starker. The NHT’s concessional offerings — at 7–9% for qualifying members — represent the primary accessible financing mechanism for Jamaica’s middle-income households, and the Trust’s Q2 2022 data showed applications running 12% ahead of the same period in 2021 as more households chose the NHT route in preference to commercial lending. This surge in NHT applications puts pressure on the Trust’s loan book and requires careful portfolio management to ensure the Trust’s long-term financial sustainability.

The Dominican Republic’s relatively resilient mortgage market — with Q2 approvals only 5% below 2021 levels — reflects the DR’s somewhat different mortgage market structure. A larger proportion of DR housing finance flows through government-sponsored low-income programmes that are not directly linked to commercial rate movements, and the tourism-linked construction sector is primarily equity and internationally financed rather than domestic mortgage-dependent. However, the commercial mortgage market for middle-class Santo Domingo and Santiago homebuyers is beginning to feel rate pressure, and a continued rise in global rates through the rest of 2022 and into 2023 is likely to moderate DR residential mortgage volumes further.

Caribbean Leaders This Month

Jamaica demonstrated the power of diaspora remittances as a counter-cyclical economic force, with a record US$318 million in July inflows providing a financial foundation for residential property investment that is insulated from local mortgage rate increases.

Guyana continues to see the most extraordinary property price appreciation in the Caribbean, driven by oil sector income that has created a housing demand surge without a corresponding expansion in supply. The market presents both opportunity and policy challenge in equal measure.

Dominican Republic demonstrates relative mortgage market resilience, with Q2 approvals only marginally below 2021 levels, reflecting the DR’s structural combination of government programme delivery and tourism-linked international finance that provides buffers against commercial rate increases.

Barbados continues to see strong west coast luxury market demand, with the island’s premium positioning and stable political environment attracting high-net-worth buyers who are insensitive to the mortgage rate dynamics affecting middle-market Caribbean property.

Trinidad and Tobago benefits from its energy revenues in maintaining HDC housing delivery even as construction costs surge, providing a volume of social housing delivery that smaller, energy-importing economies cannot sustain.

St Lucia is seeing growing interest from European investors attracted by the island’s premium tourism product and the short-term rental yields that strong occupancy rates are generating. The Soufriere and Rodney Bay markets are particularly active.

Bahamas is reporting strong demand from North American second-home buyers in New Providence and Paradise Island, attracted by the Bahamas’ proximity to the US East Coast, Caricom-status US dollar economy, and well-developed luxury property market. Nassau’s luxury segment has benefited from the same trends driving Cayman and Barbados demand.

Belize is seeing growing interest from North American buyers attracted by the country’s US dollar-pegged economy, English-language system and significantly lower price points than comparable English-speaking Caribbean markets. The San Pedro and Placencia areas are seeing the most active buyer enquiry.

Overall regional performer this month: Jamaica, whose record diaspora remittances demonstrate the resilience and scale of the island’s diaspora economy and its direct contribution to property market demand at precisely the moment when local commercial financing is becoming more expensive.

Looking Ahead

The Atlantic hurricane season entered its peak period in August, and with sea surface temperatures elevated by climate change, conditions for storm development remain favourable through October. Caribbean property owners, developers and investors will be monitoring storm tracks closely over the coming two months, with the recognition that a major hurricane strike on any Caribbean market in 2022 would add reconstruction costs and insurance market pressures to an already challenging environment. The Caribbean Catastrophe Risk Insurance Facility provides a first-loss buffer for Caribbean governments, but the scale of a major event would overwhelm any regional mechanism and require sustained international assistance.

Construction cost moderation, when it comes, will depend on a combination of global commodity price easing, freight rate normalisation and, ultimately, some resolution to or accommodation of the Ukraine war’s energy market disruptions. None of these dynamics appear likely to resolve quickly — most commodity market analysts project continued elevated energy prices through 2023 — but the rate of increase is expected to moderate. Even a stabilisation of costs at current levels, without further increases, would represent a significant improvement in the predictability of development economics for Caribbean builders and buyers alike.

For the mortgage market, the path ahead runs through the US Federal Reserve’s meeting calendar. With inflation still near 40-year highs, the Fed is widely expected to continue hiking aggressively through the rest of 2022, with implications that will transmit directly into Caribbean commercial lending rates. Caribbean households planning property purchases in the near term should factor in a likely further 150–200 basis points of commercial rate increases before the current cycle peaks, and structure their financial planning accordingly.

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.

Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomes Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com