On the Precipice: Jamaica’s Housing Market as the Debt Exchange Looms

Jamaica Homes Housing Affordability & Cost of Living Review — January 2010

• Jamaica enters 2010 with its most consequential domestic financial decision in decades imminent: the Jamaica Debt Exchange, designed to reduce the government’s interest bill and enable IMF programme support
• The global recession of 2008-2009 has hit Jamaica through reduced tourism revenues, lower remittances and tightened external financing conditions; the economy contracted in 2009
• Commercial mortgage rates remain extremely elevated; the housing market’s formal affordable segment is effectively frozen for buyers without NHT access
• NHT has been the critical functioning institution through the crisis years, maintaining disbursements through a period when all other formal mortgage channels tightened sharply
• Informal housing construction, supported by diaspora remittances, continues to deliver shelter for families priced out of the formal market
• The JDX, when it comes, will not immediately transform housing affordability but will establish the fiscal foundation for improvement over the medium term

Jamaica’s housing market opens 2010 on the edge of what may prove to be the most significant turning point in a decade. The Jamaica Debt Exchange — a restructuring of domestic government bonds that will reduce the annual interest bill and create the fiscal space that IMF programme support requires — is widely anticipated and expected in the early weeks of the year. When it comes, it will be presented as a rescue of Jamaica’s fiscal trajectory. For the housing market, it will not be an immediate transformation: the benefits will arrive slowly, through a chain of causation that runs from fiscal stabilisation to lower sovereign rates to lower lending rates to lower mortgages. But it will be the beginning of a process that, if sustained, can eventually deliver the housing market that Jamaica’s working families deserve and have been denied for too long.

The immediate backdrop is the 2009 recession. Jamaica’s economy contracted for the second successive year as the global financial crisis of 2008 — whose full domestic impact arrived with a lag — reduced tourism revenues, compressed remittance inflows and raised Jamaica’s external financing costs. The housing market absorbed these blows on top of an already strained structure: high debt, high interest rates, insufficient affordable supply and a commercial mortgage market that had been functionally inaccessible to most working Jamaicans well before the global crisis arrived.

Two Years of Global Crisis: The Housing Market’s Toll

The 2008 global financial crisis reached Jamaica through several channels. Tourism, which drives both the formal and informal economies of the island’s resort communities, fell sharply as American and European visitors reduced discretionary travel spending. Remittances from the diaspora, which sustain hundreds of thousands of Jamaican households and fund much of the island’s informal housing construction, fell in 2009 for the first time in years as diaspora Jamaicans in the United States, the United Kingdom and Canada faced their own job market pressures. Global commodity prices — including construction materials — were volatile, creating uncertainty for both developers and self-builders.

The result for Jamaica’s housing market has been two years of deepening constraint. Formal housing supply has not expanded; construction companies that had planned new residential schemes have deferred or abandoned them. Commercial mortgage volumes have declined as banks tightened credit standards in response to deteriorating economic conditions. The NHT has held its ground: its contribution income, while slightly reduced as some formal sector workers lost employment, remained sufficient to maintain its mortgage disbursement function at reasonable levels. The Trust has been, through 2008 and 2009, the one part of Jamaica’s housing finance system that has genuinely served its intended function.

What the JDX Will and Will Not Deliver

The anticipated Jamaica Debt Exchange will deliver something important: a reduction in the government’s annual interest payments that creates the fiscal space for the primary surplus that an IMF programme requires. This is significant. It addresses the most acute immediate crisis in Jamaica’s fiscal trajectory. For the housing market, the chain of benefits from the JDX is real but requires time. The exchange reduces government bond yields; this reduces the risk-free rate benchmark; this creates the conditions for lower commercial lending rates; lower commercial rates eventually reach the mortgage market. But none of this happens quickly. The JDX is an enabler of housing market improvement, not a delivery mechanism. The delivery requires several more years of sustained fiscal adjustment.

What This Means

For buyers entering 2010, the JDX’s anticipated arrival is not a reason to wait. The exchange will not immediately change NHT rates or eligibility criteria. Buyers who are eligible and have identified suitable properties should proceed. Waiting for a post-JDX commercial rate reduction that may take twelve to eighteen months to materialise meaningfully is a strategy with a real opportunity cost in continued rent payments.

For the broader market, the JDX’s most important contribution is to credibility: Jamaica’s demonstrated willingness to take difficult fiscal steps improves the confidence with which investors and lenders view the island’s trajectory, and that confidence improvement — over time — is a genuine contribution to housing market conditions.

The Outlook: A Defining Year Ahead

January 2010 is the beginning of what will prove to be a defining year for Jamaica’s economic trajectory. The JDX will come. The IMF programme will follow. The combination, if sustained, sets Jamaica on a path toward the fiscal conditions that housing market recovery requires. The path is long, the steps are slow, and the Jamaican families living in rented rooms and informal settlements will bear the cost of that slowness. But the alternative — a continued deterioration of the fiscal trajectory without the JDX’s intervention — points toward outcomes that would be far worse for the housing market, and for Jamaica’s economy as a whole. January 2010 is a moment to hold firm, to maintain NHT contributions, to protect savings, and to trust that the difficult path being chosen is the right one.

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

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