BOJ expects housing market fallout from higher rates
But central bank sticking to rate hikes for now
Bank of Jamaica officials expect the construction and housing sector to be negatively affected by rising mortgage rates but say there is no fallout yet in the market that has been red hot since the pandemic, with housing prices and valuations skyrocketing amid higher levels of inflation and record low loan rates up to last year.
The looming fallout in the housing market, which central bankers concede is a concern, is not seen by the BOJ as a strong enough reason on its own to pause the hikes in its policy rate.
On Friday, the BOJ adjusted its benchmark interest rate by half-point, moving it from 5.5 per cent to 6.0 per cent - the eighth upward revision of the rate it pays on overnight funds deposit-taking institutions since last September.
The BOJ’s Monetary Policy Committee, MPC, reporting Thursday on its August 16-17 deliberations, said it has seen loan rates beginning to climb.
“I would think that if rates continue to be increased even beyond the six per cent, it could have an impact on our housing market here. We don’t have a totally market-driven mortgage market in the sense that the National Housing Trust plays a major role, and they are not necessarily driven by market impulses,” said BOJ Governor Richard Byles in response to a question from the Financial Gleaner.
“It is a risk. I think it is something that we would watch very carefully,” he said during the bank’s quarterly monetary policy media briefing on Friday.
Another senior BOJ official, Senior Deputy Governor Dr Wayne Robinson, was even more direct about the rate-rise threat to the housing and construction market.
“There is a risk, and we do expect to see some slowdown, but at this point, we don’t think that it would drive the sector into a recession. There is going to be some slow own nonetheless. At these levels of interest rates, it would not push the construction and housing sector into recession,” said Robinson.
“When we look at the trends in mortgage credit up to June, mortgage credit is still growing pretty strongly,” he said.
The housing market in the United States, in which adverse developments foretold the global recession of 2008, has been declared to be in a recession, with the National Association of Realtors reporting this month that existing home sales fell for a sixth consecutive month in July by 20 per cent over the same time last year. Buyers are said to be now purchasing the fewest homes since the start of the pandemic in 2020 although prices have yet to reflect the level of sales decline.
July marked the sixth consecutive month of the peel-back in sales.
The central bank is also not worried about what such a market fallout in Jamaica would spell for financial institutions, some of which are part of groups that are heavily invested in property portfolios.
“I don’t think that the DTIs are as heavily invested in the mortgage business,” Byles said, singling out the mortgages while reiterating the bank’s concern about any possible fallout in the sector as a whole. DTIs are banking institutions.
At Friday’s briefing, the central bank head repeated the bank’s view, expressed in the MPC report that signs of slowing inflation to June were encouraging. Having peaked at 11.8 per cent in April, annual point-to-point inflation slowed to 10.9 per cent in both May and June and 10.2 per cent at July. Declining international commodity prices, relative stability in the exchange rate, tighter liquidity management by BOJ and higher interest rates, were credited by the central bank as the reasons for the slowdown.
The BOJ expects annual inflation to trend towards 9 per cent for the remainder of 2022, and decline further in early 2023, then move towards the targeted four to six per cent range by December 2023, as long as tensions between Russia and Ukraine do not escalate and inflation among Jamaica’s trading partners continue to fall.
The slowdown so far was not enough to convince the monetary authority to put the brakes on interest rate increases. Byles said further encouraging macroeconomic signs are needed to influence such a move.
The next rate decision is scheduled for September 29.
“Notwithstanding this good trend, the bank believes these conditions have not sufficiently solidified to ensure that inflation is sustainably on a downward path. There remain some significant risks of reversal. The fragile geo-political situation with Russia, Ukraine, and Europe in general, with its knock-on commodity price risks, cannot be ignored,” said the central bank governor.
“The reported labour shortages in selected sectors of the economy and pressures from our recent inflation experiences carry the potential for future wage adjustments that could be inflationary. High inflation in the US and other trading partners has prompted a programme of faster monetary adjustment, which could cause capital outflows from Jamaica and exchange-rate depreciation if domestic monetary policy is not properly aligned,” Byles added.
The BOJ is banking on its hefty international reserves, now at US$4.3 billion, to shield the foreign exchange market from any turbulence should world and local conditions not abate.
Byles said the BOJ was prepared to “pause its policy rate increases” if incoming data on inflation continue to track downward, the central bank would not be abandoning other market intervention policy tools. These include buying and selling into the foreign exchange market and the surrender system that requires banks to sell set percentages of their foreign currency intake to the central bank.