As Jamaicans, most of us would be familiar with the pattern of “taste and buy”. This comes up when we go to the market to buy fruits, like guinep, or whenever we stop to buy from local food vendors like the jerk pork man. We would say: “Mek mi taste it first.” And it is only after that “taste test” that we make a purchase.

We do it because we know that not everything is always as it appears. So fruits or pork may look good but taste bad or make you sick.

Unfortunately, taste and buy does not apply in real estate, so you won’t know the ‘flavour’ until you make the purchase.

Many of us have welcomed the increased construction activity and the positive impact this has on the Jamaican economy. It has helped significantly reduce the unemployment rate to its lowest level. Many people dream of owning their own home, and a few others plan to invest in real estate as a source of retirement income in the years. Real estate has undoubtedly proven to be one of the best investments, whether in residential and commercial properties.

The beautiful modern apartments and townhouses being built in residential communities across Kingston and St Andrew are numerous and stand out. Indeed, their lure would convince anyone to want one. And, yes, people have been buying them — especially young professionals who have a steady job with some savings and want to purchase their first property.

However, in recent times there have been signals that all is not well in the real estate market, both internationally and locally. It’s of interest to review the factors that go into making real estate either attractive or unattractive.

Recently, Evergrande in China, one of the world’s largest developers, was declared bankrupt and liquidated with over US$300 billion in debts. This developer had over 800 projects under construction.

Just this week, New York community bank stock fell by over 41.52 per cent in one day due to making a provision for future commercial real estate losses. At the same time, billionaire investor Barry Sternlicht warned this week that the commercial office market in the United States is headed for more than US$1 trillion in losses. In Los Angeles, an office building that sold for US$92 million in 2018 recently sold for US$44.5 million — a reduction of 52 per cent in five years.

Here at home, we have seen many high-rise office buildings, other commercial spaces, not to mention residential properties going up. But where are the buyers coming from, and who will occupy these places? Moreover, what is the likelihood of default facing our banks?

Real estate anywhere in the world is driven by three main factors:

1) interest rates

2) supply and demand

3) maintenance costs

Interest costs are the real estate kryptonite. For example, a $20-million loan at a six per cent interest rate becomes twice as expensive at a 12 per cent interest rate. In other words, if you have a loan with an interest rate of six per cent, your monthly payment will double if this cost is moved to 12 per cent.

This movement was what many Jamaicans faced when their loan payments were increased in one year when the Bank of Jamaica raised its benchmark interest rates from 0.5 per cent in September 2021 to seven per cent in November 2022.

So, new homebuyers face a substantial increase in mortgage cost compared to two years ago. This rate increase makes residential and commercial real estate more unaffordable and significantly reduces demand. Of course, there will always be demand for homes and other opportunities for property investment, but affordability is another issue.

To make matters worse, the maintenance cost of homeownership has also increased, with insurance rates rising between 50 per cent and 100 per cent over the past two years.

It may have been missed that global insurance premiums have been increasing. Last year, Lloyd’s of London, the world’s leading insurance marketplace for insurance and reinsurance, conducted a systemic risk scenario that models the global economic impact of extreme weather events leading to food and water shocks, estimating the loss to be US$5 trillion over the next five years.

Chief Executive Officer John Neal told the
Financial Times that financial risk following bank failures in the US and Europe, and systemic threats such as pandemics and climate change, would fuel demand for cover.

With insurance costs rising, apartments and other gated communities that are a part of the Strata Corporation of Jamaica have seen a rise in their maintenance costs as the laws state that, to be a part of the strata, they must have all the units or the development insured. Therefore, more money has to come in to meet the insurance costs.

Additionally, the demand has increased the cost of all trades and labour required for construction and maintenance — think plumbers, electricians, and carpenters.

With the unexpected and unplanned increases, many apartment owners are having difficulty meeting their maintenance fees. I have heard of several cases in which the owner has been taken to court for outstanding maintenance payments and others who have had to sell their units. Without owners meeting these costs, the property’s look and value will depreciate.

The first rule in economics is supply and demand. Prices rise when demand is high. One major casualty of the increased supply of apartments is that rental rates have fallen by 20 per cent to 40 per cent as tenants have so much inventory to choose from.

So, while I encourage everyone to invest in real estate long term, be aware of the risk that accompanies this sector, especially during high interest rates periods, global financial shocks, and climate change.

Therefore, here’s a piece of advice: Conduct a personal financial stress test to ensure that you are not over-leveraged in real estate to see the impact on your ability to pay mortgage and maintenance costs if they work to increase by 25 per cent.

Fortunately, indications from the US Federal Reserve, where the Bank of Jamaica takes its signals, is that interest rates will fall in 2024. Let us hope our banks follow suit to make everyone’s life easier.