The Many Facets of the Residential Real Estate Market
The current boom in real estate appears to be well-supported by economic fundamentals, but investment in the quality of residential attractiveness is needed to avoid a market bubble in the longer term.
Just as money pervades most aspects of economic life by acting as a medium of exchange, so does the residential real estate market through its extensive links across sectors of activity. This market does not only serve as an indicator of economic conditions, but has the potential to be an economic driver as well.
These links engender strong stakeholders with multiple and conflicting interests. Developers, agents, consumers of housing services and investors in real estate assets are the most obvious ones. Government is also a major stakeholder, relying on turnover in the residential real estate market to raise revenue and generate economic growth, while striving to ensure that no one is deprived of housing. Social NGOs also have a stake in the market in this regard, together with environmental organisations which lament inordinate urban sprawl in equal measure as high-rise developments.
The residential real estate provides an essential service. This calls for careful consideration of the needs of various demographic segments, with implications spanning from accommodating the changing dynamics of family size and composition, to the avoidance of poverty, to the attraction of human capital from abroad and the related foreign investment. This requires a diversified supply, affecting in no small way the quality of life of residents and visitors to the Maltese Islands.
Another way to segment the residential real estate market is by considering tenure, typically split between owner-occupied and rental-occupied, as well as holdings for temporary occupation and for investment purposes. While the high rate of housing ownership in Malta, at over 70%, is typically lauded as a sign of wealth and stability, it could curtail the dynamism required to meet changing demands of residents along their life cycles. It is also a consequence of the pattern of taxation in Malta which typically impinges burdens upon the transfer and rental of housing assets, but not on their holding.
The real estate market in Malta must service an economy whose population is growing at a rapid rate of 1.4% per year, of which five-sixths is through net immigration. At this pace, the total population in the country will be exceeding half a million persons in around 10 years’ time, of which one-fifth could possibly be non-Maltese nationals. The indigenous population will be ageing rapidly, creating specific needs in terms of real estate demand. The immigrant population will most probably be younger, but distributed at opposite ends of lower-skilled workers in jobs which are not generally amenable to the Maltese population, and persons with high skills not easily found in the country.
An early symptom of these changes and related stresses is the recently-experienced boom in upper market rental prices driven by demand from relatively wealthy immigrants which has spilled over to the rental market in general, affecting persons at risk of poverty who are living in accommodation rented at market prices. There are also early indications that growth in incomes of lower-earning households is struggling to keep up with the rise in the cost of housing in the affordable segment.
The need for an orderly development of the real estate market in Malta also stems from the economic activity dependent on it. This can be estimated at some 15,000 to 20,000 jobs, involved in construction and property development, sales and services ancillary to real estate activity, corresponding to around 5% of the country’s GDP. Government revenue through real estate transactions is estimated at around €1 out of every €30 the fiscal budget.
Against this background, the key question surrounding the real estate market is the sustainability of the present phase of expansion in sales and prices, and whether this is tantamount to a bubble.
Over the past four years, average real estate prices have been increasing by around 5% per annum, with the value of assets transacted growing by an order of around four times that rate. This is not unprecedented. Similar, and actually more pronounced rates of growth were observed between 2005 and 2008, when average prices had increased by more than 10% per year, to be in part reversed between 2009 and 2012.
This is not to say that a downward correction in real estate prices is inevitable and to be expected in the near future, because the current boom is taking place within the context of two fundamentally important differences in the economic scenario. The first is the markedly stronger expansion in the economy, measured in terms of GDP growth and employment creation, which is crucially underpinned by a fiscal surplus, highlighting the fundamentally sustainable nature of the current upturn. The second factor is the very limited expansion in credit to the real estate sector in relation to the growth of the market, which limits the likelihood of artificial price inflation.
Conditions of a bubble would be present if property prices were increasing through purchases whose ultimate intention is to sell at a profit once that prices exceed a benchmark, or when some other change in market sentiment takes place. This would typically be accompanied by property hoarding and credit expansion to finance such activities. Indications are that such a scenario is not taking place in Malta. Banks are prudent in their lending practices, while real estate is being purchased for the purposes of being effectively utilised or as a long-term investment, rather than for short-term speculation.
An eventual slowdown in GDP growth and possibly, in the influx of migrant population, could be expected to restrain the growth in real estate activity and prices. The extent of the future resilience of the market will strongly depend upon the quality of the service that it will be offering to local and foreign investors. Demand for good quality real estate can be expected to remain strong in a territory where land is a very scarce resource, provided that its residential attractiveness is safeguarded and developed. Therefore, quality should be the fundamental tenet of policy and business approaches towards the residential real estate market for the years to come.
Towards this end, architectural practices need to encompass pleasing and functional design of internal and external spaces. This must be underpinned by a land planning approach which rewards the reaping of social and economic dividends of quality design, complemented by the provision of sufficient infrastructural services especially with respect to transport, energy, water and waste.
It is high time for our country to more effectively explore the synergies which can be reaped between the provision of housing and the improvement of urban environments and services. Absent this, there will be significant threats to the quality of life in Malta emanating from excessive and insensitive development. If properly managed, the real estate market in Malta has the potential to be in itself an attractor of investment from abroad, rather than to just serve the needs of the population.
Housing is by its very nature a long term economic commitment from many aspects. In view of the smallness of the economy and territory compounded by demographic and infrastructural pressures, Malta can hardly afford any mistakes in the proper balancing of the supply and demand forces of the various facets of the residential real estate market.