Tax cuts, interest rates, privatisation and a housing bubble
WRITING in the UK Guardian, Oliver Wainwright describes a high-end totem of the excesses and iniquities of the real estate-industrial complex, in which prices are tumbling, investors are melting away and promises are turning to dust.
“It is a place where penthouses with private chapels and running tracks loom above crumbling council estates across the railway line, where scores of flats lie empty, held by secretive shell companies in off-shore tax havens, and where the division between absentee investors and owner-occupiers...could not be more stark. It is the product of politicians in thrall to property developers, driven by a blind faith in the market — even when investors started to realise that they might have bought into a mirage.”
But for the scale, Mr Wainwright might well have been writing of luxury housing in Jamaica, where a bubble has been pumped up by the Bank of Jamaica’s (BOJ) accommodative monetary policy, supported by the Government’s taxation policy, and fuelled by a relentless drive to transfer public funds through the banks down the maw of private developers. This neoliberal policy space of low interest rates, low taxes, ready access to public funds and lax regulation is a housing developer’s paradise. House prices, bearing no real relationship to the decline in the rest of the economy, have taken flight.
The side effects of these policies have been costly. Household and corporate debt is skyrocketing, small businesses, starved of financial support, are crumbling, poverty increasing, unemployment climbing, inequality worsening and prices soaring. And horror of horrors, the debt to GDP ratio has been surging. While the nation’s savings are being squandered, social peace, such as exists, is being maintained by remittances, the savings of others, quite a bit of circus and a huge dose of fantasy. A curfew here, a ZOSO there, now and then a little something extrajudicial. Let’s open up — the escape valves — before ‘de pressure buss de pipe’. And should there be a spike? Well, blame it all on personal irresponsibility.
The current property gold rush has been building for some time but really took on wings in 2019 when the finance minister, Dr Nigel Clarke, announced a series of cuts to what, he argued, were distortionary taxes which acted as impediments to economic growth. The clear intention of the International Monetary
Fund (IMF) mandated strategy was to use tax cuts to boost investment in construction which in turn would drive growth and lead to a “bubbling up” in the economy.
While taxes were being cut for the rich, however, austerity would remain the condition for the rest. Fiscal policy would continue to be tight.
Tax cut was one of three major elements of the strategy to spur economic growth; the others, working in tandem, were to lower interest rates — to levels close to zero and to transfer public funds to private developers. The roles of the BOJ and the National Housing Trust (NHT), both public entities, were critical.
The BOJ’S expansionary monetary policy to provide low interest easy money to developers through the banks was the major factor which caused house prices to flourish.
The highly solvent NHT, for its part, would take public money it held in trust and lend it to margin-gathering private banks and building societies at heavily discounted rates for onward lending to mortgagers. The NHT should not just be sitting on all this cash, when money was needed for investment, dismal scientists argued. However, instead of using the people’s money to finance affordable housing, as was ostensibly the intention, or investing in urban renewal and rural development to promote social justice, the predatory banks and building societies, along with sundry investors, were allowed to make a killing financing high end apartments and luxury townhomes.
In addition, the NHT’S barn was to be raided, the loot used for debt repayment, thereby supplying even more public funds to private interests. In 2017, the Government pillaged $46 billion from the NHT and last year, in the midst of the pandemic, it plundered the trust of an additional $57 billion. Dr Clarke claimed, inaccurately, that the funds would “help cushion the economic fallout from COVID” and “institutionalise transparency in fiscal affairs”. Her Majesty’s Loyal Opposition, who had first raided the NHT, offered a token protest. Like those in Government, many of its leaders are developers, investors and corporate executives. Very little separates the two oligarchic parties. Both have been complicit in the capture of the State and its resources by monied interests.
It was the best of times for the few; and misery for the many. A classic case of the privatisation of public assets by privateers. An upward redistribution of income, not unlike that in which the spielers of the lotto business are engaged.
The NHT, having been relieved of large sums of cash, has found itself with an urgent need to “create capital for housing investment”. Secretly it turned to its debtors, the highly profitable banks and building societies, and offered them a discount in return for early payment. Promises made to build affordable houses needed by an estimated one million Jamaicans, a third of the population, living in precarious conditions behind zinc fences, on unserviced land, in overcrowded tenements and on gully banks, have to be kept, jobs created and social peace maintained. Dr Clarke’s lame excuse of “market failure” for the shortage of affordable housing just won’t do.
Some commentators speak of feckless Government and inept bureaucrats allowing rapacious, out of control, profit-driven housing developers to breach building guidelines, violate the rights of citizens and lay waste to the environment. There is certainly that. However, what we are witnessing is the direct and expected outcome of economic orthodoxy and neoliberal public policies pushed by the IMF and faithfully implemented by both the PNP and the JLP since at least 2013. Although it is plain to see, many of those who benefit are in denial. “No housing bubble”, the Observer confidently asserts, quoting people its reporter calls “prominent practitioners” in the real estate and construction sector. Well?
The BOJ has undertaken an “empirical assessment of [the] housing price bubble” which, according to it, may be said to exist when “excessive public expectations of future price increases cause prices to be temporarily elevated”. Or when “housing prices grow faster than the fundamentals [of the economy] can explain.”
While concluding that there was no evidence of a bubble in housing market prices “at this time”, the bank has issued a carefully worded warning that “given the deterioration in macro-economic conditions, prices in the housing market [were] expected to soften in the near term.” This “softening”, the bank noted, was consistent with the statistical evidence of a falloff in prices in Kingston and St Andrew due to the novel coronavirus pandemic.
The bank’s assessment also revealed that “the real estate market might be facing increased exposure to credit risk.” Banks and building societies, the BOJ feebly urged, should therefore “closely monitor the potential risks that might emerge from exposure to real estate price changes”. The BOJ having opened the hen houses to the foxes is now hoping to keep the predators at bay. It asks others to monitor; it does not propose itself to supervise and regulate. Independent of democratic control, it appears too busy targeting and missing inflation.
Beware the coming crash of the hyper-inflated, turbocharged housing market. The consequences for the unstable financial sector and the anemic economy more broadly would be grave. A 1990s-type meltdown and bailout of the morally hazardous, is a clear and present danger, not to mention increased social unrest and conflict.