Banks not to blame - MFSA

Commercial banks are not to blame for the rocketing property prices and the government need not intervene, a report probing banks' lending terms has concluded.

Lowering the bank's share when giving out a house loan would badly affect those who cannot afford to buy their own homes in the first place, Parliamentary Secretary Tonio Fenech told The Times after analysing the report.

Prompted by a budgetary initiative, the report was drawn up by the Malta Financial and Services Authority to evaluate whether it was appropriate to issue regulations that would demand more prudent lending terms.

Practically all commercial banks are now providing 90 per cent financing of the total property value - some are even willing to finance the entire cost, provided they are given additional security.

Such terms were suspected to have fuelled the demand for property, leading to soaring prices. According to statistics that have just been issued by the European Mortgage Federation, property prices in Malta recorded the highest percentage rise among the 25 EU member states in 2004.

However, the MFSA report shows that though banks' lending terms are deemed generous, prudence is still being applied. A loan is sanctioned after a thorough repayment programme is drawn up to ensure it would not impinge on disposable income.

The report shows that loan defaulters are few and far between and these are normally affected by abnormal situations, such as marital break-ups. Even in such cases, the banks are flexible in giving a moratorium.

"Are loans becoming unaffordable and people borrowing beyond their means? This report indicates that this is not the case. There was the concern that the market was not restricted in terms of liquidity, leading to spiralling property prices," Mr Fenech said.

In the past, loans were regularised. The 1970 Banking Act gave the finance minister the right to establish the maximum amount of loans, advances and interest rates. But the regulations were subsequently revised to be brought in line with the more liberal EU rules.

Still, some EU governments manage to tweak the rules to keep a partial control on the sector. In Spain, the maximum lending rate for banks is 80 per cent of the value of property and in Hungary 70 per cent. In Slovakia loans cannot exceed a 30-year repayment period.

Mr Fenech said the government is also willing to wait and see whether the upcoming EU Green Paper on mortgages could somewhat provide reprieve to those buying new properties.

The MFSA report recommends that those who cannot afford to buy their property enter a "shared ownership" scheme with the Housing Authority, an initiative already being partly implemented.

Another option is to create a regulated social housing market, something which can pose a hurdle in a small country like Malta, Mr Fenech reckons. The Housing Authority has also instituted the urban regeneration scheme, under which it is buying some of the estimated 35,700 idle properties and reselling them at affordable prices.

Logic immediately suggests that people should switch towards the rental market but Mr Fenech said this was a delicate issue that requires a culture change.

"People think the market would be sorted by liberalisation. In reality, all properties constructed after 1995 are liberalised and still, renting has not taken off. But I can tell you that the government is actively looking at the rental issue."