Publication date: 5 April 2006 | Covering: January – March 2006
Quarterly Briefing
- Bernanke takes Fed chair: February 1; succeeds Greenspan after 18.5 years; inherits strong economy and housing boom approaching peak; credibility challenge
- Fed hikes continue: January 31 to 4.50%; March 28 to 4.75%; fifteenth and sixteenth in cycle; Bernanke signals further hikes likely
- US housing boom at peak: Home sales at all-time highs; median prices up 12% year-on-year; investment demand intense; affordability stretched in major metros
- Iran nuclear crisis: February IAEA refers Iran to UN Security Council; enrichment programme confirmed; oil risk premium; international sanctions debate begins
- Hamas wins Palestinian elections: January 25; Hamas majority; US/EU withhold recognition; Middle East peace process complicated
- Gold surges: Above US$570/oz by March; commodity supercycle; dollar weakness; inflation hedge demand
- Google goes public: IPO August 2004 success still powering tech; market cap surpasses major media companies; search dominance
- Jamaica: Strong tourism; NHT active; commercial mortgage rates high; BOJ managing domestic rates
Bernanke’s Fed Begins; Hiking Cycle Continues
Ben Bernanke officially succeeded Alan Greenspan as Chairman of the Federal Reserve on 1 February 2006, inheriting an economy in good health but with significant risks building. The housing market was at or near its peak, having delivered extraordinary price appreciation over the preceding five years driven by low interest rates, relaxed lending standards, and a cultural conviction that house prices could only rise. Bernanke’s immediate challenge was to complete the hiking cycle that Greenspan had begun without triggering either a hard landing in housing or an undue loosening of financial conditions. The FOMC raised rates at its January 31 meeting — Greenspan’s last, as it fell before February 1 — and again at the March 28 meeting under Bernanke’s chairmanship, bringing the federal funds rate to 4.75%. Bernanke’s communications challenge was significant: Greenspan had developed a style of deliberate opacity that became legendary, while Bernanke was an academic who had advocated for greater central bank transparency. His early statements as chair were parsed closely for any signal of rate intentions.
Iran Nuclear; Hamas; Commodities Surge
The geopolitical landscape was notably complex in the first quarter of 2006. Iran’s nuclear programme became an acute international crisis when the International Atomic Energy Agency’s Board of Governors voted in February to report Iran to the UN Security Council for non-compliance with the Nuclear Non-Proliferation Treaty, following Iran’s resumption of uranium enrichment. The prospect of military confrontation with Iran added a persistent risk premium to oil prices, which hovered around US$60–65 per barrel through the quarter before rising further in subsequent months. The Palestinian elections of 25 January produced a majority for Hamas — designated a terrorist organisation by the United States and European Union — over Fatah, generating a political crisis in Palestinian governance and international uncertainty about aid flows and the Middle East peace process. Commodity markets continued the supercycle that had been running since 2003: gold surpassed US$570 per ounce, copper reached record highs, and the broad commodity index continued its extraordinary performance driven by Chinese demand growth.
Jamaica: Housing Finance; Mortgage Conditions
Jamaica’s economy entered 2006 in a period of relative stability, supported by good tourism performance and a steady remittance inflow. The NHT continued its critical role in providing affordable housing finance, with subsidised rates of 0%, 2%, and 4% on loans up to J$6.5 million individually or J$13 million for two-applicant borrowings. The Bank of Jamaica maintained domestic interest rates to support exchange rate stability and control inflation, which kept commercial mortgage rates well above the NHT’s subsidised levels. The island’s housing construction sector was active in the formal market segment, with developments in Portmore and suburban Kingston, but affordable supply remained insufficient to meet the backlog of demand from lower-income workers for whom even NHT’s rates represented a significant financial commitment.
Looking Ahead to Q2 2006
The Fed’s hiking cycle is nearing its end — markets expect one or two more moves — and the US housing market is beginning to show signs of deceleration. Whether the correction is orderly or disorderly will depend largely on whether the exotic mortgage products written during the boom years produce a wave of defaults. For Jamaica, sustaining the tourism growth and managing the debt burden remain the primary policy priorities.
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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