MORTGAGES for properties used for short-term rentals such as Airbnb are causing “increasing concern” for the Bank of Jamaica (BOJ) as they show heightened levels of delinquency when compared to the rest of the mortgage market. Still the central bank indicated that the overall mortgage market remains robust, with increasing property prices “underscored by economic fundamentals, therefore, confirming the absence of a bubble”. The information is contained in the 2022 ‘Financial Stability Report’ which the central bank published at the end of March.

“There were indications of increased delinquencies among tenanted properties, primarily for mortgages issued during 2021,” the BOJ wrote in the 2022 ‘Financial Stability Report’, though it did not quantify the value of the delinquent mortgages. “Non-performance and past due states of rented properties were the highest across the identified occupancy statuses, consistent with the higher credit risk posed by properties with low owner concern,” it continued.

The BOJ made the observation after analysing data gathered over the three-year period, January 2019 to December 2021. The data were collected through a survey done with deposit-taking institutions (DTIs) from which 11,055 mortgages were analysed.

From that, the central bank pointed out that while mortgage lending continues to account for an increasingly larger share of total DTI loans – 26.4 per cent or $299.4 billion of total DTI loans in 2021 went to mortgages, up from 24 per cent or $197 billion at end March 2019 – credit risk remains low as performance among mortgages remained strong, with low levels of past due facilities.

However, that did not stop it from highlighting the risks posed to DTIs from mortgages disbursed for properties which are then placed in the short-term rental market.

“With tenanted properties becoming more dominant due to the rise of short-term rentals, the risk of capital loss will be of increasing concern, particularly where these exposures cannot be clearly identified,” the BOJ said as it added, “This will have implications for the comprehensive management of risk in the mortgage segment, to the extent that borrowers are dependent on cash flow from rental income generated by these properties to support loan repayments.”

That concern apart, the central bank also warned that as it continues the implementation of the Basel III Minimum Capital Requirements framework for supervised entities, DTIs would have to start increasing the capital set aside in the event of delinquencies, especially as they push to finance an increased percentage of mortgages.

No housing bubble

The central bank did an assessment of the housing market in Jamaica first in 2020, after concerns were raised that the pace of new housing starts and the level of mortgages disbursed, especially the $57 billion spent by the National Housing Trust (NHT), could cause a housing bubble. The BOJ which has done the survey for the past three years said it has seen no evidence to justify such worries.

“As at March 31, 2022, the credit quality of mortgages disbursed during the 3-year period was high, with over 93 per cent of these facilities reported as performing,” the BOJ pointed out.

It said by property type, nonperformance was highest among loans issued in 2019 for the acquisition of undeveloped lots, (5.9 per cent were non-performing), apartments (3.2 per cent were non-performing), houses (3.1 per cent were non-performing), and townhouses (2.2 per cent were non-performing).

“However, past due facilities by property type were notably higher (mainly among houses and apartments) in the context of the heightened credit risk environment prompted by the pandemic.”

Of note, the BOJ said its survey also showed that houses — mainly in St Catherine and Kingston and St Andrew — were the most demanded property type, followed by apartments in St Andrew.

By parish, delinquencies were found to be highest in the more rural areas of Jamaica, mainly in St Elizabeth, Westmoreland, and St Mary. However, total mortgages issued to these parishes represented a mere 4.4 per cent or 606 borrowers of total mortgages disbursed during the three-year period, suggestive of a fairly low appetite by DTIs, in general, for risk exposures to these areas.

Conversely, there were indications of increased non-performance among loans issued in 2021, primarily in Manchester, St Catherine, and St Andrew. Past due performance in the main residential areas of St Andrew and St Catherine hovered about the average for the portfolio of mortgages (5.4 per cent of total mortgages issued).

Other findings

In aggregate, the survey also found property values were highest in the more urban parishes (Kingston and St Andrew, St Catherine, St James, and St Ann), which also saw the highest effective demand during the three-year period. On average, properties in St Andrew, St Ann, and St James were valued between $17.5 and $25 million, with similarly valued but less-demanded properties recorded in St Mary, Portland, and Manchester. There were sharp increases in the average property value for properties in Westmoreland, St James, Portland, St Mary, and Hanover. In 2021, residential property prices in these parishes reflected average growth of 62.0 per cent.

“On the other hand, over the same period, the growth in property values in St Thomas and St Catherine were benign.”