The Property Market…yet again

The debate about property has been going on for decades. Yet public discussions and media attention have gained momentum in these past few months. A discussion which benchmarked the key points was recently organised by EY Malta, with two teams of economists taking different sides of the argument as to whether the upward trend in property prices is sustainable. But what has made this subject so topical?

The Maltese property market seems to continuously defy economic theory and logic. Supply of property is constantly on the rise (and yes, pun intended). In the coming months, and possibly years, new high-rise buildings might be flooding the market with a number of additional units, while an analysis based on latest data indicates that a potential range of between 10% and 15% of all properties will remain vacant. Yet, prices continue to rise, and in certain cases/locations, these go well above historic trends (i.e. an average of 4.5% per annum for the past 15 years).

This abnormal performance is fragmenting local opinion into two schools of thought. At one end some believe that we are teetering on the edge and property prices might tumble, bringing down with them various related industries. At the other end, there is the belief that prices will continue to rise because of the limited land available in Malta.

It is difficult to ascertain who is right, if anyone at all. Yet, given the great developments in the market and the importance that the building industry has always held in our economy, it is wise to look at the ecosystem in which it operates and see what factors are at play.

In terms of socio-economic factors, the small island size, coupled with the changing structure of families, is leading to higher demand for smaller units. This is expected to persist over the coming years.

The sustained economic growth of the island has also played its part. Compared with the EU, Malta is recording very high economic growth rates – for instance, in 2015, GDP growth reached 6.3% (vs 1.7% in the EU). This means that there is, on average, higher disposable income, more wealth being generated, and as a result more wealth being invested/stored in key asset classes, including property. Yet, this is not a permanent factor. Malta’s economy is wide open to external shifts. These could include a general economy decline in other trading countries, or regulatory changes. It would therefore be naïve to think that since Malta managed to weather the storm in 2008 nothing could ever dent our economy.

Governments have also played their part in supporting the market, through multiple initiatives (sometimes happening at the same time). EU accession, a number of asset repatriation schemes, non-resident schemes such as the Individual Investment Programme, the High Net worth Individual Schemes, and the First Time Buyers’ Scheme have all played their part. The relaxation of certain planning and development regulations has also been a key factor in this regard. The sustainability/repetition of such schemes is clearly an area of intense debate in public fora.

Another internal factor relates to the Maltese culture of house ownership, with around 80% of home ownership in Malta, compared to an average 71% in the EU. Indeed in Malta property is king. Moreover, about a third of homeowners also hold a second property (such as a summer house), a garage, commercial premises and/or agricultural land. Much of this property is often held as a store of value and as an investment.

However, there is a strong economic argument that investment in property is less productive than investment in R&D, human capital or innovation. The counterargument is that alternative investments in Malta are hard to find. This is especially magnified in the current low-interest/yield scenarios, where rental yields are higher than the yield-to-maturity on, say, ten-year government securities. However, the risk attached to property is often undervalued, as people do not expect a fall in prices based on historical data, or a reduced demand for letting.

Affordability has also been under control up till now. Anecdotes of family members acting as guarantors or helping financially younger acquirers are commonplace. Moreover, as more women have been joining the workforce, home prices have remained affordable given the higher income of a typical household. Yet, as prices continue to rise, the situation might be difficult to sustain further. Property prices have been increasing at higher rates than average wages. Maltese middle-class families are already being outpriced from certain areas such as Sliema, Valletta and St Julian’s, displacing them to other areas. If this trend spreads further, more localities might become unaffordable, requiring government to rethink its social housing role.

External factors also impinge on the local property market. In the last decade, Malta has witnessed a significant influx of foreigners. Eurostat figures show that in this period the number of foreigners has more than doubled, and official figures probably underestimate the actual reality. This influx could be due to the fact that neighbouring countries have been experiencing high unemployment rates. Moreover, some of Malta’s key economic sectors, including igaming and the financial services, attract, by their very nature, a great number of foreign workers. One could assume that this trend will be sustained due to Malta’s historical inclination towards foreign direct investment. Yet, given our small size, an assessment of our carrying capacity limits is probably warranted, especially given the current state of our key infrastructural setup. Furthermore, one must also keep in mind the footloose nature of some sectors, and the mobility of workers.

Monetary policy is also another issue which has had an impact on the industry. Following the crisis, the ECB substantially lowered interest rates, and provided further liquidity to the banking system, including local core domestic banks. This has created a huge dilemma for all banks – the need to provide further financing to all areas of the economy (including property-related projects), at a time when regulation is getting tighter and more onerous. Additionally, if certain investment decisions are being undertaken when interest rates are at a historic low, will such decisions remain feasible when interest rates eventually start going up?

All the above factors have in the past worked together to position property as a safe, solid and comfortable investment for the Maltese. Within this context developers continue to thrive. Indeed, in the coming years there will be a huge pipeline of large scale developments, including various high-rise buildings, pending planning applications. Even though this could be a sign of economic growth and prosperity for the country, one must still keep a couple of points in mind.

The local infrastructure, such as roads, utilities and drainage systems are already under great pressure. Consequently, attracting more people to reside in the new developments will simply increase this pressure further. The environment is also bearing the brunt of all this development frenzy – once exploited, it will not be recoverable in the future, denying their enjoyment to future generations. Over and above all this, the higher prices will go up, squeezing the more average Maltese families out of the housing market.

It is clearly unwise to think of worst case scenarios since this situation has been sustained over decades. Yet it is equally unwise to simply rest on our laurels and believe that the situation will always remain as is. Indeed, authorities, investors and developers must tread carefully. It is advisable that all developments, projects and government initiatives are paced, rather than rushed, and are based on critical and analytical analysis of the market, rather than just historical data.

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