On the Precipice: Jamaica’s Housing Market as Domestic and Asian Crises Converge, July 1997

Jamaica Homes Housing Affordability & Cost of Living Review — July 1997

• Jamaica’s domestic financial sector is under severe stress; FINSAC has been established to manage the rescue of failing institutions and several are already under government management
• The Thai baht collapsed in early July 1997, triggering the Asian financial crisis; the regional contagion is spreading and global emerging market conditions are tightening
• Commercial mortgage lending is becoming more expensive and more restricted; the building society sector, central to working-class mortgage access, is under particular stress
• NHT continues to function as Jamaica’s primary affordable housing finance institution; its structural insulation from commercial deposit market dynamics is its critical advantage
• Patterson has just won his third consecutive general election on March 18, 1997; the economic environment his new government inherits is more difficult than the mandate suggests
• Housing construction is being affected by rising costs and tightening credit; the pipeline of new affordable housing supply is beginning to thin

July 1997 is a month of extraordinary financial significance, both for Jamaica and for the global economy. In Jamaica, the domestic financial sector crisis that has been building through the mid-1990s is now manifesting in institutional failures and government intervention. The Financial Sector Adjustment Company (FINSAC) has been established to manage the rescue of failing domestic financial institutions; several are already under government management or have had their deposit liabilities guaranteed by the government. The fiscal cost of this intervention, being absorbed by Jamaica’s public accounts, will shape the country’s economic path for the better part of a decade.

And then, on July 2, 1997, Thailand’s central bank allowed the Thai baht to float, abandoning the currency peg it had maintained for years. The baht immediately collapsed, falling sharply against the US dollar. Within weeks, the contagion that economists had worried about in the abstract became real: Indonesia, Malaysia, the Philippines and South Korea all came under intense speculative pressure. The Asian financial crisis had begun. For Jamaica, this external development — arriving at a moment of domestic financial sector stress — created a compounding effect that would deepen the difficulties already underway.

The Housing Market in the Eye of Two Storms

Jamaica’s housing market in July 1997 sits at the intersection of two emerging crises. The domestic financial sector stress has already begun to affect commercial mortgage availability; institutions under FINSAC management or under market-driven distress are reducing or stopping new mortgage originations. Rates from the institutions that remain are beginning to rise as they price for the environment they face. The supply of new formal housing is beginning to be affected as developer credit tightens.

The Asian crisis, though new in July 1997, will work its effects on Jamaica through the mechanisms of global capital market risk aversion. International investors, pulling back from emerging markets generally in the wake of the Asian contagion, will make Jamaica’s external financing more expensive; the Bank of Jamaica will face pressure to maintain higher domestic interest rates to defend the Jamaican dollar and attract capital; those higher rates will transmit directly into the commercial mortgage market.

What This Means

For aspiring homeowners, July 1997 is a warning moment. The commercial mortgage market that existed two or three years ago — expensive by international standards, but accessible — is beginning to close. The window is narrowing. Families who can access commercial mortgage financing at current rates, and whose financial position supports the commitment, should consider whether the rates available now are preferable to those that may prevail in 1998 and beyond. NHT contributors approaching eligibility should engage actively with the Trust; the NHT route, always the most affordable, is becoming even more relatively attractive as commercial alternatives deteriorate.

For the Patterson government, the housing market challenge of July 1997 is a preview of a much larger challenge to come. The FINSAC intervention will consume fiscal resources; the IMF programme will constrain fiscal space; housing investment will compete with crisis management costs for priority in the public accounts. The housing aspiration of Jamaica’s working population — a core PNP political commitment — will be one of the casualties of the financial sector crisis.

The Outlook: The Storm Is Just Beginning

Jamaica’s housing market in July 1997 is at the beginning of a difficult period whose full extent is not yet visible. The FINSAC crisis will deepen through 1997 and 1998; the Asian crisis will reverberate through global markets through 1998 and into 1999; interest rates will continue to rise; construction activity will continue to slow. For Jamaican families managing housing aspirations, the advice of July 1997 is to engage with NHT now, to protect savings and contribution records, and to approach commercial mortgage decisions with the awareness that conditions are likely to worsen before they improve.

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

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