When Lehman Fell: The Shock That Reached Kingston, Montego Bay and Every Jamaican Mortgage Queue

Jamaica Homes Housing Affordability & Cost of Living Review — October 2008

• Lehman Brothers filed for bankruptcy on September 15, 2008, triggering the most severe global financial crisis since the 1930s; the consequences for Jamaica are only beginning to arrive
• Global credit markets have frozen; the risk aversion rippling through the international financial system is raising Jamaica’s external borrowing costs
• The JLP government under Prime Minister Golding, in its first full year, is managing the immediate fiscal and external financing consequences of the global shock
• Commercial mortgage rates in Jamaica, already elevated by domestic factors, are now under upward pressure from global risk repricing
• NHT’s operations are unaffected in the immediate term; the Trust’s domestic funding model insulates it from the direct effects of the global credit freeze
• The tourism outlook for 2009 has darkened sharply as American and British consumers face recessionary conditions; resort-area housing markets are beginning to feel the impact

On September 15, 2008, Lehman Brothers — one of the largest investment banks in the world — filed for Chapter 11 bankruptcy protection in New York. The event was not, in itself, a Jamaica story. The firm had no significant operations on the island and its employees did not walk into Kingston offices to collect their belongings. But the consequences of Lehman’s collapse spread through the global financial system with a velocity and breadth that made every national economy — including Jamaica’s — a downstream casualty within weeks. Global credit markets froze. Stock markets plunged. The interbank lending that underpins the entire global financial system seized up. Governments around the world scrambled to prevent their own financial systems from following Lehman into insolvency.

Jamaica’s exposure to this global event is real and deep. The channels are the same ones that transmit every global economic change to Jamaica’s shores: tourism from the United States and United Kingdom, remittances from the diaspora, external capital markets that price Jamaica’s sovereign bonds and determine the country’s borrowing costs. All of these channels are now under severe stress. The housing market, reading the signals that the global crisis is sending through these channels, faces its most severe external shock since September 2001. The difference between 2001 and 2008 is that the September 11 attack was a one-day event with a recoverable aftermath; the global financial crisis of 2008 is a systemic event whose aftermath will unfold over years.

The Credit Freeze and Its Local Mortgage Implications

Jamaica’s commercial banks do not have the same direct exposure to the US mortgage-backed securities that brought down Lehman and are straining other global financial institutions. The FINSAC crisis of the late 1990s instilled a conservatism in Jamaica’s local financial sector that has, paradoxically, made it more resilient to the specific products that are causing the global crisis. But Jamaica’s banks are not immune to the global repricing of risk. The sovereign risk premium on Jamaica’s government bonds will rise in a global risk-off environment, raising the benchmark rate against which all Jamaican lending is priced. Commercial mortgage rates, which were already elevated by Jamaica’s own fiscal constraints, now face additional upward pressure from the global credit repricing.

Tourism’s Coming Reckoning

The full consequences of the global recession for Jamaica’s tourism sector have not yet arrived in October 2008’s data. Tourist arrivals through the summer were generally positive; the global crisis’s consumer impact takes months to translate into booking cancellations and reduced forward reservations. But the signals are clearly negative. American consumers facing job uncertainty, declining asset values and tightened credit are precisely the consumers who reduce discretionary travel first. The 2009 tourist season — whose bookings are now being made — is expected to be significantly weaker than 2008. For resort-area residential property, whose values and rental income potential are directly linked to tourism performance, the forecast is one of meaningful pressure through the coming year.

What This Means

For existing homeowners, the immediate concern is mortgage serviceability in an environment of rising uncertainty about income. Homeowners in tourism-dependent employment sectors should review their financial resilience — the relationship between their mortgage payment and their income, the buffer in their savings — and ensure they are prepared for an income disruption if the tourism recession arrives with the severity that the global signals suggest.

For buyers, the next six months are likely to produce motivated sellers whose price expectations have adjusted to new market realities. Buyers with cash, or with NHT pre-approvals and qualifying properties, are in a relatively stronger negotiating position than they were six months ago. The environment of caution is also an environment of opportunity for the financially prepared.

The Outlook: Buckle In for a Difficult Year

October 2008 is the beginning of what will be a very difficult twelve to twenty-four months for Jamaica’s housing market. The global crisis is not resolved; its full domestic consequences have not yet arrived. The NHT is sound. The commercial banks are not in the direct firing line of the mortgage securities crisis that is consuming their US and European counterparts. But the indirect consequences — through tourism, remittances, external borrowing costs and general economic contraction — are coming. Jamaica’s housing market should buckle in and focus on what it can control: maintaining NHT contributions, managing mortgage serviceability carefully, and positioning — for those with the capacity — for the opportunities that crisis markets eventually create.

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

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