The future of our property market

Architect Robert Musumeci argues that the market will not collapse if future governments ensure economic growth to guarantee stable incomes to potential buyers

In the wake of ever increasing property prices, it is only natural that property investors are concerned whether such prices will continue to be sustained by potential buyers in future years. Against this background, it is important to establish whether the current demand for Maltese property is being driven by a number of temporary factors that are bound to disappear in a couple of years' time, implying that emerging property values are tantamount to a bubble that will eventually burst under its own weight.

Notwithstanding the incurred transaction costs each time a property is traded, the number of new apartment units approved by MEPA continued to reach unprecedented record levels, from 4,180 in 2001 to 9,081 in 2005. Concurrently, the number of approved conversions and redevelopment reached unprecedented increases in 2005, with the number of existing dwelling units undergoing rehabilitation reaching 4,577.1

The average increase in property prices between 2004 and the first quarter of 2006 is shown in Table 1. Although it would be imprudent to anticipate yearly results by simply extrapolating quarterly results available to date, it is evident that the average market prices for all types of property registered a significant appreciation during the first quarter of this year.

The data must also be interpreted with caution, given that such data remains generic, while it is acknowledged that the price of property for a given typology varies widely depending on the site location, with properties considered to be at the high end of the market, tending to appreciate at higher rates. The data itself could therefore encourage prospective investors to speculate further, on the pretext that property secures the best short-term investment.

In these circumstances, property investors are aware of the prospect that our property market could be simply landing to an unprecedented market bubble underlined by expectations of future price increases rather than the real need for demand of property.

Many consider Malta as no exception to global trends, considering that other countries like Hong Kong, also characterised by limited land supply, has also witnessed price decreases to the tune of 60 per cent in the past years. Japan has also experienced the same fate, with property today being valued at less than half it used to cost in 1991.

Our focus should therefore be shifted to evaluate whether current local prices can be truly justified on rational economic grounds, establishing the key reasons underpinning the continued surge in property prices during the course of recent years.

Malta's outward economy, which remains the hallmark of this government, underlined by market deregulation, and drastic improvements in our economy, have invariably rendered a more active market.

Our economy has, in general terms, continued to reveal positive trends, with job creation and investment prospects showing positive results, even though our economy has not been spared from the increase in the price of oil. In turn, this meant that more people, over recent years, felt that they could afford a home.

In parallel, rising prices gave buyers expectations about future price rises, giving an incentive to lend more. In turn, this resulted in higher demands and prices, with developers being stimulated to start expanding supply dramatically. Against this background, it is uncontested that the level of unoccupied properties has soared.

Yet, it is also acknowledged that Maltese first-time home buyers, in their majority, are in search of new apartments within the Lm 40,000-Lm 48,000 range, the latter being the price which first-time buyers are mostly willing to pay. This signifies that demand is driven not only by speculation, but also by housing needs underlined by specific demand and price range requirements.

On an equally significant note, the idea that property remains the safest investments remains embedded in our culture, recalling further that locally, property prices never collapsed. In the worst scenario of a property market collapse, unlike the stock market, property would still remain a tangible asset. This has certainly triggered more investors to include property in their diversified portfolios, and in turn resulting in higher demands.

With our commercial banks offering relatively low interest rates, due to ever increasing competition in the Maltese mortgage market, it has become relatively easy to acquire the cost of buying property with a mortgage equivalent, more or less, to a monthly rent. This implies that despite that economic theory suggests that house prices should always rise more or less in proportion to rents (because assets should always be priced as a function of their underlying potential cash flow), local property prices and rents will continue to diverge, since the Maltese continue to prefer the buying option in the given circumstances.

Banks, spurred by competition, are prepared to lend more money, for longer periods, to more people than ever before, implying that initial average monthly mortgage payments have declined, as have down payments. This renders property more accessible to a greater number of people, resulting in greater demand underlined by a more accessible market.

It is also acknowledged that development boundaries have now been formally defined, with the Labour Opposition pronouncing itself against the possible extension of existing development boundaries.

This leaves little option for any future government to increase land supply. This signifies that planning regulations have rounded off the potential supply, inferring that price increases are the only way for the market to clear.

Although the house price-to-income-ratio in Malta is at its highest level ever, the majority of first-home buyers still continue to consider property as their safest form of investment provided they can meet the monthly mortgage payments.

Still, the market will not collapse on condition that future governments secure a stable economy which can guarantee continued investment and job creation, thereby assuring solid incomes to potential buyers. It must be underlined, however, that if our wage structures do not undergo significant changes, there is suggestive evidence that unit apartments will appreciate at much lower rates in the coming years.

This, of course, assumes that the cost of monthly mortgages converge with monthly rents while banks refrain from continuing to increase the maximum terms of loan repayments in the coming years.

1. State of the Construction Industry Report 2005, published by the Building Industry Consultative Council. (BICC), 2006

2. State of the Construction Industry Report 2005.

rmperiti@onvol.net

Robert Musumeci, mayor of Siggiewi and chairman of the Building Industry Consultative Council.