The marginal propensity to consume is higher for the poor than the rich and progressive taxation is used to somewhat rebalance the equation. That will hardly help if expenditures are not properly ordered and consumption takes precedence over investment.

To buy or to rent

Acquiring a house is the single largest item of expenditure in most individuals’ lifetime and is often done in the wrong way. To start with, it is mistakenly viewed as an investment but in reality it is the biggest ticketed item of consumption. People therefore rush to get on the house train as if there is no tomorrow and invariably misplace their investment dollars. Many of these consumers acquire their dreams by way of a mortgage oblivious to the fact that in the first few years all the payment goes only to service the interest cost. Unless there is significant capital appreciation in those years, when other costs associated with ownership is considered they would be better off to rent.

There is no good economic reason why the discounted present value of rental income should diverge from the rent saved by an owner-occupier, in the long run both should reflect the underlying value of the property.

Minimal deposit

Excepting for economics, there are a thousand reasons to be an owner-occupier. In monetary terms it would be compelling if no deposit was required as the opportunity cost would be close to one but the conventional wisdom is to make high deposit to reduce the mortgage payment. Purchasing a house for cash is unwise as the risk of ownership becomes too concentrated and the opportunity cost too high.

Hood-winked

In August 1972 newly constructed 1-Bdr apartments were offered at Dunrobin Court at $19,000 each. Today, the same unit is being sold for $3.0m with a perceived capital gain to the investor. However, when inflation for the period is factored in, that unit should be worth $5.2m. Had the same investor place the $19,000 in a range of stocks representing the Jamaica Stock Exchange (JSE) main index, it would now be worth over $25.5m.

Considering that the transaction cost involved in real estate approximates to around 20% of the selling price and it provides convincing evidence of the depletion of capital.

Another example over a shorter duration does not prove otherwise. An Oakland 1-Bdr apartment purchased in 1995 for $1.3m is currently priced at $2.8m. The inflation- adjusted price is $3.4m, but that money invested in the JSE index would be valued at $9.5m

While the above examples are not conclusive for the market as a whole and need a more in-depth study to examine amongst other things the point at which the return is maximized it does suggest that home ownership devours capital.

Rising for a fall

The retreat in stock prices in early 2005 saw more funds being channeled into real estate. This has had the effect of increasing the rental stock and has provided a drag on rental prices. Landlords will therefore need to supplement their mortgage payments as rental yield falls in the short term and might come to view buy-to-let properties as bad investments. Couple this scenario with the inability of first-time buyers to enter the market and the writing is on the wall.

Prices in nominal terms are at astronomical levels and have outpaced wage gains; add the level of crime to the mix and it becomes a lot more difficult to justify. The disruption to the criminal network by the security forces, and especially the killing of “Bulbie” will resonate in property prices as relatives and associates try to disaggregate assets to avoid confiscation.   

Mental institutions

Following the 1993 stock market collapse, the majority of financial institutions in Jamaica ceased lending for the purchase of stocks. Until about a year ago they stayed fat on government paper, but have recently gone head first into consumption loans. It appears more prudent to lend for equities than the purchase of motor vehicles, but then again, I am not a banker.