Interest rates slip further in Jamaica; boost for real estate and stocks

Wednesday, July 11, 2018

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Jamaican interest rates are relatively on par with US interest rates in terms of nominal value — with US treasury rates at 1.87 per cent and Jamaican rates slightly higher at 2 per cent — as the Bank of Jamaica chopped interest rates by 20 per cent on June 28 from 2.5 per cent to 2 per cent.

According to, “Generally, higher interest rates increase the value of a country's currency. Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency. Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value.”

So what does that mean for investors?

In regards to real estate, while generally illiquid, the returns outweigh sitting on savings accounts. According to the Global Property Guide (GPG), gross rental yields on apartments in Jamaica range from 9.67 per cent to 13.24 per cent. The gross rental yield is the rental return that a landlord will make on his property, before repairs, taxes, empties, and other costs.

The GPG noted that several logistics-related developments could further boost Jamaica's real estate market as properties — both commerical and residential — are created to meet expected demand from:

* Kingston Harbour shoreline — Port Royal to Kingston to Hellshire

* Transportation systems for Kingston and Montego Bay

* Caymanas logistics hubs

* Montego Bay and Falmouth

That said, despite lowered interest rates, GPG observed that the local mortage market is not particularly strong.

In March 2017, the average interest rate for mortgage loans in the country was 8.92 per cent, according to the Bank of Jamaica.

For building societies, the average mortgage loan rate dropped to 9 per cent in 2016. This is down from 9.5 per cent in 2015, 9.7 per cent n 2014, 10 per cent in 2013, 10.2 per cent in 2012, 11.1 per cent in 2011, and 12.5 per cent in 2010.

For commercial banks, the average mortgage loan rate fell to 9.4 per cent in 2016. As inflation has slowed to 1.7 per cent in 2016, down from 3.7 per cent in 2015, 6.4 per cent in 2014, 9.5 per cent in 2013, 8 per cent in 2012, and an average of 12.5 per cent from 2004 to 2010, interest rates are likely to fall further.

The maximum loan-to-value (LTV) ratio for foreigners is about 70 per cent of the appraised value of the property, with a term period of 20 years.

The GPG continues, “However, the mortgage market is really small. From around 2 per cent of GDP (gross domestic product) in 1999, the ratio of mortgages to GDP rose to 3 per cent in 2006, then slid back to around 2 per cent of GDP and has been at that level since then. The National Housing Trust (NHT) leads the mortgage market with around 49.2 per cent market share in 2015, based on the figures from the BOJ. Building societies own 41.3 per cent of the market. Credit unions have a market share of 7.7 per cent. Insurance companies have the lowest market share at only 1.8 per cent.”

Turning to the stock market, investing analyst John Jackson notes on his blog, “The sharp reduction in Bank of Jamaica policy rate to an unprecedented 2 per cent and treasury bill interest rates to record lows of 2.5 per cent is set to push stocks values much higher, unless profits for most of the listed companies decline. The shortage of supply of many listings continues and is set to result in a big rise in prices going forward before supplies will be able to satisfy what is likely to be a rising demand.”

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