There has been growing controversy, concerning the real estate market in Jamaica and whether or not it is due for a correction. A market correction is sometimes defined as a temporary decrease during a bull (positive) market and in terms of real estate can be be manifested in a decline of 10% to as much 50% in value over a short period of time. Economists and financial analysts in Jamaica conclude that a correction is inevitable, whereas real estate market professionals continue to argue that this not likely, given the fact that demand continues to outstrip supply and will continue to do so for the foreseeable future. In other words, the real estate experts expect the current housing bubble to continue at least over the short to medium term. A housing bubble is characterized by rapid increases in the valuations of real property until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This in turn is followed by a market correction, in which decreases in home prices can result in many owners holding negative equity (a mortgage debt higher than the value of the property). This is of course not a new scenario as this obtained in the Jamaican market place during the financial meltdown of the 1990’s, when large volumes of real estate, previously held by varying Financial Institutions, Corporate Enterprises and individuals were suddenly offered on the market, driving values considerably downwards.
However the real problem is that as a housing boom continues the investment decisions become less and less sound. In the early years of a boom it is different. The developer would be duty bound to ensure that the requisite feasibility analysis and due diligence exercises were completed before anyone would trust them with their money, however, with several projects now being pre-financed by willing buyers even before construction has commenced, has led to a degree of lassitude creeping into the market with potentially deleterious effects. This leads markets that are already over-optimistic about investment opportunities into making serious errors of exuberance because the full facts are not known.
Nevertheless, several useful and significant real estate projects are currently underway in Jamaica. However, it is also true that over-optimism among investors has pushed valuations to levels that are inconsistent with the outlook for real estate sales and rents. Indeed, in some sections of the Jamaican market, real estate values have increased in excess of 275 percent since 2005 with values moving from $8,000 - $9,000 per square foot in 2005 to as high as $22,000 per square foot currently. This has no doubt contributed to the $50 billion value attained by the local real estate market in 2007. However cognizance must be taken of the fact that this housing bubble is largely focused in the upper middle and upper income socioeconomic groups, but not to the same degree in the middle and lower income groupings. Indeed with the National Housing Trust and the principal Building Societies increasing their lending rates in recent times this is likely to drive costs even higher. This will be further compounded by expected increases in general insurance premiums.
Indeed, whereas there is reportedly high demand in the $3 million to $15 million market, there is little supply. This is compounded by the continued creeping commercialization in the established residential sections of urban communities, while ceding large parts of the designated commercial zones to criminal elements. Indeed in the Corporate Area (Kingston and St Andrew), it is estimated that 20 to 25 percent of the lands have been abandoned because of a legacy of criminal activity whereas another 25 percent is in urgent need of regeneration. Hence, it can be argued that pricing in the Jamaican housing market is being determined by market distortions rather than the true interaction of the forces of demand and supply and therefore such pricing is not sustainable. Further with average real incomes declining in Jamaica, the current real estate boom is not sustainable.
This raises the real prospect of the real estate market being faced at least over the medium term with issues of ballooning inventories, falling prices, and sharply reduced sales volumes. However, given the fact that the Jamaican real estate market is not homogeneous, the degree of fallout anticipated will vary with market segments. In fact the most significant fallout in anticipated in the high end of the market, which through the application of higher density ratios, is expected to reach saturation point. As vehicles for speculation, their utility is likely to wane over the medium term, given the exorbitant cost structures that prevail and therefore render the properties as being too expensive for the rental market. Further with the recession in the US economy, there will be the attendant fallout in remittance flows among other adverse developments and hence there is likely to be a negative impact to varying degrees on all segments of the Jamaican real estate market. In large part, the current real estate pricing structure largely precludes the lower middle income and lower income groups and with the increases in mortgage rates, the issue of affordability is exacerbated. However, since the Government of Jamaica has committed itself to the regeneration of Downtown Kingston as well as other urban centres over the medium term, if successful, this will likely lead to a dampening in demand for commercial property in residential areas and lead to a reduction in price.
In any event, with the price mechanism in the local real estate market so hopelessly distorted it is difficult to conceive of a scenario where there will not be a substantial market correction. Whereas it is readily acknowledged that land prices over time will generally trend upwards, market fundamentals do not support the pricing structure which currently obtains in the Jamaican real estate market.
However the real problem is that as a housing boom continues the investment decisions become less and less sound. In the early years of a boom it is different. The developer would be duty bound to ensure that the requisite feasibility analysis and due diligence exercises were completed before anyone would trust them with their money, however, with several projects now being pre-financed by willing buyers even before construction has commenced, has led to a degree of lassitude creeping into the market with potentially deleterious effects. This leads markets that are already over-optimistic about investment opportunities into making serious errors of exuberance because the full facts are not known.
Nevertheless, several useful and significant real estate projects are currently underway in Jamaica. However, it is also true that over-optimism among investors has pushed valuations to levels that are inconsistent with the outlook for real estate sales and rents. Indeed, in some sections of the Jamaican market, real estate values have increased in excess of 275 percent since 2005 with values moving from $8,000 - $9,000 per square foot in 2005 to as high as $22,000 per square foot currently. This has no doubt contributed to the $50 billion value attained by the local real estate market in 2007. However cognizance must be taken of the fact that this housing bubble is largely focused in the upper middle and upper income socioeconomic groups, but not to the same degree in the middle and lower income groupings. Indeed with the National Housing Trust and the principal Building Societies increasing their lending rates in recent times this is likely to drive costs even higher. This will be further compounded by expected increases in general insurance premiums.
Indeed, whereas there is reportedly high demand in the $3 million to $15 million market, there is little supply. This is compounded by the continued creeping commercialization in the established residential sections of urban communities, while ceding large parts of the designated commercial zones to criminal elements. Indeed in the Corporate Area (Kingston and St Andrew), it is estimated that 20 to 25 percent of the lands have been abandoned because of a legacy of criminal activity whereas another 25 percent is in urgent need of regeneration. Hence, it can be argued that pricing in the Jamaican housing market is being determined by market distortions rather than the true interaction of the forces of demand and supply and therefore such pricing is not sustainable. Further with average real incomes declining in Jamaica, the current real estate boom is not sustainable.
This raises the real prospect of the real estate market being faced at least over the medium term with issues of ballooning inventories, falling prices, and sharply reduced sales volumes. However, given the fact that the Jamaican real estate market is not homogeneous, the degree of fallout anticipated will vary with market segments. In fact the most significant fallout in anticipated in the high end of the market, which through the application of higher density ratios, is expected to reach saturation point. As vehicles for speculation, their utility is likely to wane over the medium term, given the exorbitant cost structures that prevail and therefore render the properties as being too expensive for the rental market. Further with the recession in the US economy, there will be the attendant fallout in remittance flows among other adverse developments and hence there is likely to be a negative impact to varying degrees on all segments of the Jamaican real estate market. In large part, the current real estate pricing structure largely precludes the lower middle income and lower income groups and with the increases in mortgage rates, the issue of affordability is exacerbated. However, since the Government of Jamaica has committed itself to the regeneration of Downtown Kingston as well as other urban centres over the medium term, if successful, this will likely lead to a dampening in demand for commercial property in residential areas and lead to a reduction in price.
In any event, with the price mechanism in the local real estate market so hopelessly distorted it is difficult to conceive of a scenario where there will not be a substantial market correction. Whereas it is readily acknowledged that land prices over time will generally trend upwards, market fundamentals do not support the pricing structure which currently obtains in the Jamaican real estate market.
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4 comments:
I agree. The price of real estate in the desirable parts of Kingston is getting to the point of being ridiculous. Whether the market adjustment will be as severe as thought is not known but it is inevitable.
Amen. I only hope that we dont have a repeat of what occured in the late 1990's. The issue of negative equity is a clear and present danger and can be only be ignored to our peril.
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Apartment For Sale In Kingston
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