A Decade of Debt, a Change of Guard: Jamaica’s Housing Market Under the New PNP Administration

Jamaica Homes Housing Affordability & Cost of Living Review — October 2012

• The People’s National Party, under Prime Minister Portia Simpson Miller, has been in office for nine months following the January 2012 general election, inheriting an economy with debt near 140 percent of GDP
• IMF programme discussions continue; the government has presented a fiscal framework to the Fund but a formal Extended Fund Facility has not yet been signed
• The 2010 Jamaica Debt Exchange reduced domestic interest payments but did not resolve the structural debt burden; a further debt management exercise is increasingly discussed among economists
• Commercial mortgage rates remain elevated, keeping the formal housing market inaccessible to most working Jamaicans; NHT continues as the primary affordable lending vehicle
• The construction sector is suppressed, with limited new residential development commencing in conditions of credit tightness and subdued consumer confidence
• Urban rental markets, particularly in Kingston and Portmore, remain under pressure as household formation continues without adequate formal supply

When the People’s National Party won the January 5, 2012 general election — a result that returned Portia Simpson Miller to the Office of the Prime Minister after seven years in opposition — it inherited an economy in which the promises of electoral competition were already constrained by the arithmetic of public debt. The 2010 Jamaica Debt Exchange, executed under the outgoing JLP administration, had reduced the domestic interest burden but had not resolved the deeper problem: Jamaica’s debt stock remained near 140 percent of GDP, interest payments still consumed more than half of government revenue, and the fiscal space for social investment, including housing infrastructure, was essentially non-existent. The new administration’s freedom to act was bounded from its first day in office by the economic reality it had inherited.

Nine months later, in October 2012, the PNP government is managing an extremely difficult fiscal environment while simultaneously negotiating with the IMF for programme support that could stabilise Jamaica’s external financing position. The negotiations are at an advanced stage but have not yet produced an agreement. The housing market, reading the macro environment with the sensitivity of a market that depends on household confidence and credit conditions, reflects the uncertainty of this pre-resolution period in every metric: cautious buyers, withdrawn developers, flat transaction volumes and a rental market stretched well beyond comfortable capacity.

The JDX Legacy in the Mortgage Market

The Jamaica Debt Exchange of February 2010 was the government’s first major attempt to address its interest burden through a restructuring of domestic holdings. It persuaded domestic financial institutions to accept lower rates on their government bond portfolios, reducing annual interest payments. The JDX succeeded in its primary objective and avoided the disruptive consequences of a disorderly default. But two years later, its limits are apparent. The exchange reduced the interest rate paid on domestic bonds but did not reduce the principal amount of the debt. Jamaica continued to issue new debt to fund its primary deficit and to roll over maturing instruments. The net result is that while the interest savings from the JDX were real, the underlying debt trajectory has not been fundamentally altered. The debt ratio remains dangerously elevated, and the sustainability calculations that worried analysts in 2010 continue to worry them in 2012.

For the mortgage market, the JDX’s post-2010 environment has been characterised by rates that are high by international standards but slightly lower than the pre-JDX peak. Commercial mortgage rates from the major banks have been in the high double digits. These rates are simply unaffordable for the majority of Jamaican households. A family with a combined monthly income of J$100,000 cannot service the debt on a property priced at J$8 million financed at commercial rates. The arithmetic closes off commercial mortgages for most first-time buyers and leaves the NHT as the only practical formal financing option for working Jamaicans.

The Simpson Miller Administration’s Housing Inheritance

Every incoming government inherits the consequences of its predecessor’s choices. The PNP’s housing inheritance in January 2012 included a NHT that was operational and reasonably well-funded; a construction industry that had contracted from its pre-crisis levels but retained experienced capacity; a planning and approval system that remained slow and expensive; and a housing deficit that conservative estimates placed at upward of 100,000 units across the island. The administration’s stated housing priorities included expanding NHT access, improving the land titling process and pursuing partnerships with the private sector for affordable housing delivery.

In practice, the fiscal constraints that bind the new government are so severe that the space for new housing policy initiatives is extremely limited. Budget allocations for capital works, including housing-related infrastructure, have been compressed as the government pursues the primary surplus targets that the IMF requires as a condition for programme support. The NHT, thankfully, does not depend on budget allocations and has maintained its function. But the broader enabling environment for housing delivery — infrastructure investment, planning reform, incentives for affordable development — cannot be meaningfully advanced in a period of fiscal compression of this severity.

Who Is Still Building, and Who Is Buying

In October 2012, the residential property segments that are still showing life are those least dependent on commercial finance. Incremental self-build construction, funded by diaspora remittances and household savings accumulated over months or years, continues in communities across the island. NHT-financed purchases of smaller units in approved schemes are proceeding at a modest pace. Luxury and upper-end residential sales — properties in the hills of St Andrew, in resort communities of St James and Portland — continue to attract the cash buyers, diaspora purchasers and foreign residents for whom commercial mortgage conditions are a secondary consideration. The segment that has essentially closed is the formal affordable and middle-market segment: the two and three-bedroom homes in new residential schemes that are priced for the commercial mortgage buyer on a J$150,000 to J$300,000 monthly household income. This buyer cannot get the financing. The developer cannot sell to this buyer. And so the development does not proceed.

What This Means

For NHT-eligible buyers, the advice is consistent with every prior quarter of this review: maintain contributions, build the record, identify qualifying properties and proceed when the transaction is financially sound. The NHT’s subsidised rate is real and durable. The commercial market’s dysfunction does not diminish the NHT opportunity; if anything, it makes NHT access more valuable relative to the alternatives.

For the rental market, the dynamic of rising demand meeting static supply is producing the conditions for rental yield improvement that informed investors should be monitoring. Solid properties in well-served locations — near schools, transport links and employment centres — are generating returns that compare favourably with the alternatives available to small investors in the current low-growth, low-rate deposit environment.

The Outlook: Awaiting Clarity From Kingston and Washington

The IMF negotiations will, in due course, resolve. An agreement — whether on terms the government finds acceptable or whether delayed by difficulties in reaching those terms — will eventually determine the shape of Jamaica’s fiscal path for the coming years. The housing market is waiting for that clarity. Not because the agreement alone will transform the market — it will not, at least not immediately — but because clarity about the fiscal framework removes one layer of the uncertainty that is currently suppressing every category of investment and expenditure decision. When the IMF discussions conclude, Jamaica’s housing market will know the terrain on which it must operate for the next several years. That knowledge, even if the terrain is difficult, is more actionable than the uncertainty of the present. For now: October 2012 is a month for preparation, not for action, and the preparation that is most useful is the accumulation of NHT contributions, savings and information that will position buyers for the transactions that become possible once the fiscal picture clarifies.

This review is produced for informational and journalistic purposes only and does not constitute financial, legal or investment advice.

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