Letter of the day: A closer look at the housing issue
THE EDITOR, Sir:
I write regarding articles titled 'Home Swift Home', dated December 5, 2014, and 'NHT Increases Loan Ceiling by $1 Million', dated November 11, 2015.
These are welcome moves by the government. The policy move in 2014 to reduce the entry cost into home ownership from on average 17 per cent to 5 per cent is critical in shoring up demand. Similarly, a reduction in interest rate and an increase in loan ceiling are equally critical to shore up demand. What do these policies have in common? They are both demand-side policies, which will be rendered ineffective over the medium to long term, and even more so if increased demand leads to greater inflationary pressures. The policies themselves could induce inflationary pressures.
Jamaica's middle class, especially public sector workers, over the past eight years have tightened their belts, yielding to the government's demands for a wage freeze. This has shifted the middle class closer to the poverty line. Many studies have shown that the middle class of any country is critical to achieving economic growth, and as such, it is imperative that this group be revived. How is this linked to the initiatives highlighted in the articles above? There are not enough supply-side initiatives.
The supply of houses is not like bread. It takes time to build them, and when one project has been completed, it takes time for another to be approved. Additionally, owners of existing housing stock have a reservation price at which they are willing to resell and will not sell if it is a profitable rental property. If prices do not increase to match reservation prices, they will hold on to the assets until the market hits that price. All this means is that the supply of houses is relatively inelastic (relatively non-responsive to price).
Note that the government's policies have not shifted the supply curve outwards or affected elasticity of supply. Neither do they segment the demand for houses. So don't be surprised if the price of houses increases even further with these policies since the demand for houses will increase.
Therefore, for these policies to be widely effective, they need to be coupled with a policy that either segments the demand for houses or increases the supply, or a combination of the two.
My recommendation is to establish a housing development agency and an oversight organ to complement the National Housing Trust (NHT). The NHT has in the past found itself with excess liquidity, which, in my view, is bad for the housing market and growth. The NHT should be operating at the margin. A complementary housing development agency should be able to take the proposed $5.5 million loan and provide a single-family home. This would allow many first-time homeowners to own a piece of this land. The oversight organ would ensure that the NHT is operating at the margin and that the housing development agency is operating efficiently. Furthermore, the feedback across these agencies would help the NHT understand if the loan ceiling is realistic. This should also reduce red tape such as identification of land and other agency approvals associated with housing development.