Jamaica: A Sellers Market for Now

The Jamaican housing market continues to operate in a dysfunctional manner, as the associated prices remain disconnected from market fundamentals. Indeed, housing prices are at levels which surpasses any historically identifiable relationship to rents or salaries. Annual rents range between 8.5 and 11.5 percent of purchase prices in the upper end of the market. With mortgage rates hovering in the 14 percent range at the lower end of the yield curve, it costs approximately 65 percent more to borrow money to purchase a house, than it does to rent the same thing. At the middle and lower end of the Jamaican real estate market, average rents range between 2.8 and 5 percent of the purchase price, so in this category it costs more than twice as much to borrow money to buy a house than it does to rent the same thing. Further, total owner costs including taxes, maintenance and insurance are estimated at approximately 5 – 9 percent, which at the middle and lower end of the market, is almost twice the cost of renting. Similarly, salaries are largely unable to cover mortgages, which are primarily funded at the upper end of the market by the proceeds of a second sale and remittance flows. Indeed, it is instructive to note that the Building Societies in Jamaica use a benchmark formula which dictates that mortgage payments must not exceed 30 percent of gross income as a measure of affordability, but in reality most purchases are far in excess of that.

The picture has improved somewhat with a 60 percent increase in rental rates in Jamaica in 2007 relative to 2006 and the 67 percent increase in sale prices experienced between 2005 and 2007. Indeed, for example, in the Golden Triangle sale prices of J$40m for a 3-bedroom townhouse are not uncommon, nor is a price tag of US$1.2m per acre of land, with rents routinely averaging between US$2,000 – US$4,000 per month. This is replicated in many other residential communities in Jamaica particularly in Kingston 6 and 8, but tends to cater only to the upper end of the market.

However, the fact that most sellers require a 15 to 20 percent deposit and closing costs (inclusive of stamp duty and legal fees) are estimated to be 10 – 13 percent of the purchase price, has excluded a substantial number of potential purchasers. Further, the cost of home insurance is proving to be a challenge in the Jamaican market, particularly at the upper end where the extraordinarily high values lead to insurance syndication (as no single carrier is willing to carry the entire risk). Indeed, particularly in the lower and middle income groupings, more persons are opting for own-insurance which has its own inherent challenges. This is of course compounded by the annual re-valuation exercise, that is usually required under powers of a mortgage and which valuation is usually priced at 0.5 percent of the valuation price.

However, Jamaica is not the worst in the Caribbean Region in terms of residential pricing and in fact is ranked near the bottom, in terms of cost per square metre, relative to its neighbours. Jamaica’s average cost per square metre for residential housing according to Global Property Guide Research is determined to be US$1,678 only surpassing Aruba and Dominica. At the top of the regional scale is Bermuda which is calculated at US$7,861, followed by Barbados at US$6,728 per square metre.

While it remains true that over-optimism among investors has pushed valuations to levels that are inconsistent with the outlook for real estate sales and rents in Jamaica, these values are likely to increase further in the short term after which a market correction is expected. In any event, though a market correction is anticipated, as long as developments remain concentrated in a few areas, creating artificially high demand, prices will increase but so will the degree of frustration among the majority of persons who will recognize that their dreams of owning a home are becoming more elusive with every passing day. In the interim, though, the Jamaica’s real estate market will remain a sellers dream.