Avoiding a supply/demand mismatch in the property market
Author: George Mangion
Published on Malta Chamber 16th July, 2018
The House Price Index issued recently by Eurostat, which measures the changes in transaction prices of new and already-existing dwellings which are purchased by households, shows that house prices in Malta increased from an index of 105.45 to 111.07 between 2016 and 2017, using 2015 as the base year.
Taking into consideration the annual average rate of change, property prices have increased by 5.5 per cent in 2016 and 5.3 per cent in 2017. This increase has been seen by local media as being quite modest, when compared to what is going on in other EU countries, some of which have reported increases of up to 11.7 per cent in Czech Republic, 10.9 per cent in Ireland, 8.8 per cent in Latvia and 8.9 per cent in Lithuania. Nonetheless, the rate of increase in prices in Malta has been slightly higher when considering the EU’s average, at an increase of 4.3 per cent in 2016 and a further increase of 4.4 per cent in 2017.
The Central Bank of Malta confirmed that advertised property prices have been on the increase over the past year, increasing from an index of 238.4 in the first quarter of 2017 to 241.9 in the same quarter of 2018. A prolonged escalation in property prices may be a worrying trend, despite assurances given by a KPMG report commissioned by the Malta Developers Association. The latter recently concluded that a property bubble is not expected to take place. By definition, one usually associates this phenomenon with the onset of “gentrification”, which in simple terms means that rich tenants buy or rent properties that push market prices upwards, possibly rendering a host of buyers with modest means unable to compete. A bubble may eventually burst, leading to a rapid decline in house prices and bank failures, as has happened in Spain, Portugal and Dublin. This overheating occurs when increased demand, high investment and unbridled speculation lead to an increase in property prices until demand can no longer match the supply. This economic pattern is triggered by a number of factors, which typically work congruent to each other.
In a situation of positive economic growth associated with full employment, there is a tendency for individuals to have more disposable income. It is popular trend for such extra funds to be disbursed on housing, which is considered as a safe haven. Furthermore, low interest rates coupled with easy credit terms by lending institutions, make it attractive for individuals to obtain a property loan. Risk-loving individuals do take this opportunity to leverage investments in the market, causing a sharp increase in the demand for properties and consequently higher prices. Will the rate of increase in foreign executives renting high-end apartments be sustainable? One may argue that type of gentrification breeds a social malaise, rendering property prices unaffordable for the low-income earners.
Whilst rising prices are typically a sign of positive growth, a sustained increase in house prices should not be taken lightly. A bubble causes lack of affordability by low-income earners or first-time buyers, and consequently some individuals end up digging from their own savings to afford monthly repayments. In cases where borrowers cannot rely on parents to supplement their earnings, they will be forced to work longer hours to sustain loan repayments, and find enough cash for daily expenses. During an economic downturn, it is not uncommon to have buyers struggling to pay mortgages, and in extreme cases, the banks will foreclose. Obviously, in the short-term, the market will get flooded with properties, causing an over-supply and a sudden drop in house prices. Additionally, there may be situations where developers and house owners may have accumulated debt that exceeds the value of the collateral. This causes a distressed market and usually leads to a further drop in property prices.
While not yet attesting that a mismatch is prevalent, PKF is carrying out a study focused on the conditions touching the property market in Malta. In particular, through this study, our team of economists shall be analysing the complex factors driving up demand for specific categories of properties. These include volatility of prices per category over the years, and an analysis of whether the current inventory of properties exceeds the anticipated future demand. PKF is doing this exercise as part of its Corporate Social Responsibility, and we are very excited to share our results with members of the Chamber, so we urge everyone to stay tuned for further updates regarding this topic.