Jamaica Homes Monthly Mortgage & Housing Finance Review — June 2023

Publication date: 5 July 2023 | Covering: June 2023

Monthly Briefing

• NHT landmark mortgage reforms effective July 1: J$7.5 million limit, new 5 per cent band — four days ago
• US Federal Reserve holds at Jun 13–14 meeting at 5.00–5.25 per cent; first pause in 10-meeting cycle
• July Fed hike to 5.25–5.50 per cent widely anticipated; June dot plot shows 2 more 2023 hikes
• BOJ overnight rate holds at 7.00 per cent; inflation still above target but declining
• Pre-reform NHT: J$6.5 million individual limit; 0, 2, 4 per cent bands now superseded
• Commercial mortgage rates 8–12 per cent in sustained elevated environment

NHT’s July 1 Reforms: Effective as of This Week

Four days before this review goes to press, the National Housing Trust’s most significant package of mortgage product reforms in several years came into effect. As of 1 July 2023, the Trust’s mortgage limits, interest rate bands, and multi-applicant ceilings have been materially enhanced. The individual open market loan limit has increased from J$6.5 million to J$7.5 million. A new J$8.5 million option is now available for eligible contributors purchasing properties valued at J$12 million or less. Multi-applicant ceilings have risen to J$15 million for two-contributor loans and J$21 million for three-contributor loans, up from J$13 million and J$19.5 million respectively.

The structural addition of a new 5 per cent interest rate band for contributors earning above J$100,000 per week is the most consequential policy change within the package. The previous framework offered 0, 2, and 4 per cent bands; the 4 per cent tier was the ceiling for all higher-income contributors, creating limited differentiation in the upper part of the income range. The 5 per cent band creates a more progressive and commercially rational structure: it gives the NHT a mechanism to serve higher-income contributors in a way that is appropriately priced relative to their income, while maintaining the cross-subsidy that allows the Trust to offer 0 and 2 per cent rates to lower-income contributors.

The market’s response to the July 1 reforms has been immediate. Estate agents and developers who operate in the NHT-eligible price range have reported a surge in enquiries from contributors who have been waiting for the higher limits to take effect. Applicants who previously found the J$6.5 million ceiling insufficient for their target properties can now access an additional J$1 million, and those purchasing in the J$12 million or below range can access J$8.5 million — making it easier to close the funding gap between what NHT provides and what a property costs. The reforms arrived at exactly the right moment: Jamaica’s property prices have risen considerably in recent years, and the new limits are better calibrated to the current market reality.

US Federal Reserve June Pause: A First Break in the Cycle

The US Federal Reserve’s Federal Open Market Committee held the federal funds rate unchanged at the 5.00 to 5.25 per cent target range at its June 13 to 14 meeting — the first pause in a tightening cycle that had seen ten consecutive rate increases beginning in March 2022. The pause was widely anticipated but not unanimous in market pricing ahead of the meeting, and Chair Jerome Powell’s explanation was careful: this was a deliberate choice to allow the Committee time to assess the cumulative impact of the tightening already delivered, not an indication that the hiking cycle was over. The accompanying dot plot reinforced this message, showing a median projection of two further 25-basis-point hikes before year-end 2023, implying a terminal federal funds rate of 5.50 to 5.75 per cent.

Market participants interpreted the June pause as a de facto acknowledgement that the tightening cycle was approaching its end, even if not quite there. The dot plot’s projection of two more hikes was seen by many as an upper bound rather than a firm commitment, with the actual number of additional hikes depending on how US economic data evolves through the summer. The July 25 to 26 FOMC meeting is widely expected to deliver one of those projected hikes, bringing the federal funds rate to 5.25 to 5.50 per cent — a level that would represent the highest US policy rate since 2001.

For Jamaica, the Federal Reserve’s pause and its implication that the cycle is approaching its end is a positive contextual development. The pressure on the Jamaican dollar from elevated US rates will ease as the US cycle concludes. Jamaica’s BOJ will gain the policy room it needs to begin its own easing cycle once inflation reaches the target range, without the constraint of having to simultaneously manage the exchange rate implications of a still-hiking Federal Reserve. The timeline for BOJ cuts remains uncertain, but the trajectory of global monetary policy is clearly moving toward easing.

BOJ Holds: Seventh Month at 7.00 Per Cent

The Bank of Jamaica’s overnight policy rate remains at 7.00 per cent per annum, unchanged since November 2022. Jamaica’s inflation has been declining through 2023 — from the 7 to 9 per cent range in the first quarter toward 7 to 8 per cent by mid-year — but has not yet reached the 4.0 to 6.0 per cent target range. The BOJ’s communication has been consistent: the rate will be held at its current restrictive level until the inflation data provides sufficient grounds for beginning to ease. With inflation still 1 to 2 percentage points above the target ceiling, the Bank sees no basis for an early move.

The commercial mortgage market reflects the BOJ’s sustained tight stance. Rates of 8 to 12 per cent across the deposit-taking sector have prevailed through the first half of 2023, maintaining significant pressure on affordability for buyers who rely on commercial finance. The arrival of the NHT’s July 2023 reforms provides a partial but meaningful offset for the hundreds of thousands of Jamaicans who qualify as NHT contributors: the Trust’s rates of 0 to 5 per cent are dramatically below commercial alternatives and make the NHT the first port of call for eligible buyers regardless of the commercial rate environment.

Understanding the New NHT Framework: Before and After

For the benefit of contributors and buyers assessing their options in the post-July 1 environment, it is useful to set out what has changed. Under the pre-July framework, the individual loan limit for open market purchases was J$6.5 million, and no tiered property-value option existed. Interest rate bands were 0, 2, and 4 per cent based on income, with the 4 per cent band serving as the ceiling for all higher earners. Multi-applicant loans were capped at J$13 million for two contributors and J$19.5 million for three.

Under the post-July 1 framework, the individual limit for open market purchases is J$7.5 million, with a J$8.5 million option for qualifying properties valued at J$12 million or less. The interest rate structure now includes a 5 per cent band for the highest earners. Multi-applicant ceilings have risen to J$15 million for two contributors and J$21 million for three. The NHT’s build-on-own-land limit, which has been J$10 million, remains unchanged. Together, these changes represent a meaningful expansion of the NHT’s ability to meet the actual housing finance needs of its contributor base in a market where property prices have risen substantially since the previous limit structure was set.

Looking Ahead

The US Federal Reserve’s July 25 to 26 meeting is the next major event for global monetary markets, and a 25-basis-point hike is the consensus expectation. If delivered, this will bring the federal funds rate to 5.25 to 5.50 per cent and may mark the cycle’s peak. For Jamaica, the BOJ’s next MPC meeting will incorporate the June and July CPI data when available. The inflation deceleration trend is expected to continue, bringing the BOJ gradually closer to the conditions it has set for beginning to ease — a development that remains most likely to materialise in 2024 rather than 2023.

For Jamaica’s housing market, the July 2023 NHT reforms are the dominant near-term story. The expansion of limits and the new rate band represent concrete, immediate relief for the cohort of NHT contributors who had found the previous framework inadequate for their needs. Combined with the pipeline of 41,000-plus NHT housing solutions and the continued activity of the private development sector, the reforms add to the structural conditions for a more active affordable housing market in the second half of 2023 and into 2024.

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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.

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