Will the property bubble burst?

A topic that comes up regularly in my home visits is how more difficult it is becoming for young couples to buy their first home and how the rise in interest rates is making it harder for them and the rest of all those who have to pay their mortgage apart from trying to make ends meet taking care of their family.

Property prices are still high, even though in its Annual Report for 2006 the Central Bank states that "the slowdown in the rate of increases in property prices observed in 2005 continued throughout 2006, particularly in the latter half of the year. Advertised property prices rose by 3.7%, significantly less than the 10.4% recorded in 2005".

The same report has a table showing that between 2002 and 2006 the Malta Environment and Planning Authority (MEPA) approved the building of 29,733 apartments. The number of permits for apartments shot up from 3,420 in 2002 to 8,961 in 2006. In those five years MEPA approved the building of 37,806 dwellings. How many of them have actually been bought and how many of them have people living in them? How many of them remain vacant like thousands of other properties around Malta and Gozo?

More properties are being built. It is an act of faith in Malta that what happens in other countries that the property market can collapse when there is oversupply of houses cannot happen here. Cracks seem to be appearing in this dogmatic belief and some discerning people are beginning to realise that steps need to be taken not to allow the property market to crash but that somehow a soft landing must be managed if investors and banks and those that put their hard earned savings in them are not to be hurt badly.

A few weeks ago in Parliament I criticised the lack of vision and leadership shown by Government in failing to create the right incentives and conditions to channel into more needed areas for investment the millions and millions of liri that have gone into property.

Resorts like Bugibba, Qawra and St Paul's Bay are calling out for investment in new hotels and new facilities for tourists but Government has not created any incentives for investors to put their money into tourism. Over the years we have seen that the real estate sector grew fast as people repatriated their funds and invested in property. The same pattern is being followed now as people seek to park their hoarded cash ahead of euro adoption. But people should be wary that the laws of economics apply in Malta like they apply elsewhere. There are people who are ready to invest millions in property development without keeping an eye on demand.

At a recent seminar it was reported that 10,000 new apartments are being built each year yet fewer than 3,000 are being sold each year. Some are under the illusion that foreigners are eager to snap up Maltese properties, yet only some 300 foreigners a year were actually buying property in Malta because prices were lower elsewhere. If few foreigners are buying properties in Malta and the Maltese cannot afford them, how are all the new buildings going to be sold?

Banks and investment consultants clearly need to do their work and educate investors on the nature of their investment and not feed dangerous illusions to their clients. Government should have used the amnesty it has just granted to those who hoarded Lm250 million to design schemes to encourage profitable investment in other areas of our economy and reduce the current dependence on real estate.

Vacant, vacant everywhere

We have ended up having thousands of couples who cannot afford to buy their first home and thousands of vacant properties without any buyers. Research carried out by Professor Joseph Falzon shows that between 1987 and 2006, property prices had risen sixfold. In fact, in 1980 the average price of property was just under Lm20,000 per unit. This rose to just over Lm40, 000 per unit by 1996. Ten years later, statistics show a massive leap to an average of Lm100,000 per unit.

Professor Falzon's research shows that Malta has a particular situation where property prices have been increasing despite the number of vacant units. In 1995, the last official data published so far show that, excluding summer residences, there were already over 25,000 vacant residential units. The more updated statistics of the national census held in 2005 have not been published so far. They would be worth examining closely when they are published.

We need answers to these questions: how many vacant residential units do we have at present? How many vacant units are we going to have in 2010 and in 2015? Which areas have most of the vacant units? Given our economy's dependence on the construction industry, how would a crisis in this sector affect us all? Will there be a just a 'correction' of property prices or will the shock be more painful?

What are the banks going to do to calm the euphoria for building more and more dwellings without buyers? Professor Falzon's research shows that in the area of bank loans in 1980, the outstanding amount of liri in house loans was negligible. In 1994, this figure rose to Lm100 million and in 2001 it rose again to Lm250 million. But the latest figures show that the total amount of outstanding house loans is around Lm800 million. Professor Falzon's findings show said that over the past six years, the country had produced the next 10 years' demand for flats and maisonettes.

How long can this insanity go on and on? We have turned our country into a building site. "The total lack of appreciation of the need for architectural quality and personality has further aggravated the situation. In many parts of the islands uncontrolled building made deep inroads on the cultural heritage. The situation was sufficient to clearly demonstrate the deterioration to which the entire country will be subjected unless radical measures are taken to prevent this happening."

Can you believe that these words were written way back in 1963 by Italconsult, the Italian consultants commissioned by the United Nations and the Government of Malta to write the Master Plan for Malta Tourism? By the way, that master plan was never made public.