BOJ assessment confirms no bubble in the housing marketMonday, April 05, 2021
BY DURRANT PATE
A recent assessment by the Bank of Jamaica (BOJ) is confirming that there is no bubble in the local housing market.
This confirmation comes amid concerns raised by some players in the market that a bubble might be on the horizon given the growing number of real estate projects over the years and the escalating inability of potential buyers to purchase at prices they are unable to afford.
A bubble exists when excessive public expectations of future price increases cause prices to be temporarily elevated. That is, when housing prices grow faster than fundamentals can explain, it might signal the emergence of a bubble.
In its just published Financial Stability Report 2020, the BOJ reports that “the results of the assessment confirmed that there was no evidence of a bubble in housing market prices at this time. However, given the deterioration in macroeconomic conditions, prices in the housing market are expected to soften in the near term.”
The BOJ says this is consistent with statistical evidence of a fall-off in prices within Kingston and St Andrew (KSA) in light of the COVID-19 pandemic. Scenario assessment carried out by the BOJ reveals that the real estate market might be facing increased exposure to credit risk.
“In light of the foregoing, banks and building societies have been urged to closely monitor the potential risks that might emerge from exposure to real estate price changes,” the BOJ declares. In carrying out its assessment on the real estate market, the BOJ utilises a component assessment of equilibrium prices signalled that the acceleration in house prices within KSA since 2017 was largely attributed to a decline in unemployment.
Though more moderate since 2016, Jamaica's central bank opines that “local consumer prices continue to induce upward pressure on house prices. The steady climb in house prices in St. Catherine were influenced by the positive and significant relationship with increases in US prices, which is a proxy for imported inflation.”
The BOJ adds that the gradual decline in mortgage rates has had a miniscule effect on explaining trends in house prices in the region.
Following improved macroeconomic and lending conditions over the period 2015 to 2019, there were several initiatives aimed at enhancing accessibility to homeownership in Jamaica. The ensuing increased demand for housing solutions led to growing concern about the potential for a bubble in the housing market.
In light of this, the BOJ embarked on various assessments including continuing work on the development of a local housing price index to give a fair representation of price trends in key market segments and a model-based approach to determine whether housing prices in Jamaica were over- or undervalued relative to fundamentals.
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