With 75% home ownership in the last population census, it is clear that Barbadians highly value owning their ‘piece of the rock.’ As expected, growth in mortgages was one of the main drivers of the credit boom experienced in the mid-2000s. What is surprising, however, is that long after the credit boom ended and economic activity began to slow in 2009, growth in mortgages continued to grow at elevated rates. As shown in Figure 1, mortgage growth only plateaued from 2013, four years after the growth in other consumer loan products waned. The fall-off in mortgages since 2013 is in line with the reduction in the applications to construct buildings[1] submitted to the Barbados Town and Country Planning Department (see Figure 2). This article investigates key indicators that may explain the pre-2013 resilience of the mortgage market and shed some light on what will be required to spark a revival in mortgage growth.
Figure 1: Growth in Mortgages
Panel a: Month-on-Month Growth in Total Mortgages Outstanding
Panel b: Net New Mortgages, 12-Month Rolling
Source: Central Bank of Barbados, Antilles Economics and author’s calculations
Figure 2: Trends in Applications to Construct Buildings
Source: Barbados Town and Country Planning Department and author’s calculations
Much of the growth in mortgages prior to the downturn was spurred by falling interest rates, rapid GDP growth, relatively high household income (compared to prevailing incomes today) and low unemployment rates. Information on average quoted mortgage rates is only available from 2007, however, as depicted in Figure 3, it is clear that mortgage rates have declined apace with overall loan rates. In fact, after the brief increase during the credit boom of the mid-2000s, average loan rates fell by on average 70 basis points every year since 2008 while quoted mortgage rates declined by 40 basis points on average during the same period. The difference in the degrees of decline has resulted in a narrowing of the spread between the quoted mortgage rate and the overall lending rate over the years, implying that rates on other types of loans have been lowered at a faster rate than that of mortgages.
Figure 3: Trends in Loan Rates
Source: Central Bank of Barbados
The growth in mortgages is highly correlated to growth in economic activity, and since 2012 economic activity has been depressed (see Figure 4). Similarly, average annual household income in 2012 reached its lowest level since the economic boom peaked in 2008. Although the estimate for the end of 2015 suggests that average household income may be increasing, it remains below both the highs of the late 2000s as well as the average achieved prior to the boom (see Figure 5), which begs the question: is it enough to qualify for a mortgage? The Terra Caribbean Land Price Index suggests that land prices declined by 12.2% since peaking in 2011, compared to a marginal increase in annual household income during the same period. It can be argued, therefore, that there may be continued demand for land loans, which do not always get captured in the mortgage loan statistics. Regarding home purchases, anecdotal information suggests that the minimum mortgage required to purchase a starter home in Barbados is between $400,000 and $500,000, which in turn requires an annual household income of between $59,000 and $74,000 at quoted interest rates to qualify. With annual household incomes averaging below this figure, it would appear that even if there were a desire for a mortgage, the average household would not qualify. This situation forces mortgage lenders to focus on the relatively small segment of the population that both qualifies and is looking for a mortgage, a segment that may not be large enough to significant drive mortgage growth.
Figure 4: Growth in Real GDP and Total Mortgages Outstanding
Source: Central Bank of Barbados and author’s calculations
Figure 5: Median Household Annual Income (Bds$)
Source: Barbados Statistical Service, Antilles Economics and author’s calculations
The future of mortgage lending in Barbados looks like a continuation, and possibly a deterioration, of current depressed conditions. The forecast for the economy points to elevated downside risks for economic growth and employment, which does not bode well for household incomes. Even though interest rates are expected to continue to fall, the low interest rate environment is not anticipated to be sufficient to outweigh the dampening effect of weak economic conditions and increased uncertainty.
[1] Includes all buildings, not solely residences.
