Property prices

I recall a conversation with some friends of mine more than a year ago on the rapidly rising prices of Maltese property. The prevalent mood around the table was that average prices would keep rising between 5% and 10% per annum – as was the trend according to various economic reports on the matter. Some other friends, however, argued that it was only a matter of time before the Maltese property market witnessed a dramatic fall in prices, typical of the proverbial bursting of an asset bubble.

I recall thinking that both hypotheses were probably right, but only to a certain extent. I put forward my own thoughts about how the price movements would develop: prices would continue rising, but at a decreasing rate, after which they would stabilise, remaining relatively fixed over a period of years.

A year and a few months following the abovementioned conversation, the Central Bank of Malta’s latest Quarterly Review (Pg 30, if you're interested) has confirmed that average property prices have, over the last year, flattened out. The word average is key, here: prices of finished maisonettes, for example, have fallen by 5%; townhouse prices have fallen by 16%; the price of villas, on the other hand, has risen by 7%.

On average, though, property prices have risen by only 0.1%, which is in stark contrast to the relatively high increments seen in previous years. The National Statistics Office’s figures – though at a slight variance to the Central Bank’s findings – also show a significant slowing down, with the all-property price index registering no double-digit growth between 2007 and 2008 (albeit for one exception – November 2008, though you don’t have to be a rocket scientist to know why that happened).

Where does the market go from here? Nowhere, quite frankly. On the one hand, there doesn’t seem to be much pressure for prices to rise further (as shown by recent property discounts, for example). On the other hand, there is also little potential of a sudden dramatic fall in property prices typical of an asset bubble burst. I will attempt to give three reasons as to why I believe that there shall be no general property price crash in Malta.

My first point relates to what economic theory refers to as demand elasticity; in other words, how easy it is for buyers to substitute one commodity for another. Housing, in this regard, is extremely demand inelastic. Property has almost no substitutes, unless, that is, you’re willing to start a home in a tent (or, on a more serious note, put up with Malta’s outdated and impractical rent laws). Some prospective property buyers may very well be able to delay purchasing property; very few, though, have the luxury to postpone their purchases indefinitely. This is especially the case with first-time buyers, many of whom are newly-married couples not particularly intent on hanging on to their parents.

A second set of factors slowing down the fall in average house prices is foreign demand for Maltese property, as well as increased incomes on the part of Maltese individuals, including, in this regard, the recent property splurge in the months running up to the introduction of the Euro. These factors explain why the price of villas and townhouses keeps rising whilst the price of other housing categories falls.

The third factor relates to asset bubbles. There is, as of yet, no clear explanation on the formation and bursting of asset bubbles. Having said that, what is a fact is that asset bubbles predominate in markets with high volumes of both buyers and sellers. Though there are certainly plenty of prospective buyers in the Maltese property market, there are far less sellers, and many of these are agencies colluding tacitly with one another (following one another's lead, for example). In other words, therefore, individual buyers and sellers on the Maltese property market still exhibit considerable control over movements in prices, and thus have a say in how prices fluctuate.

Talk of Maltese property prices ‘bursting’, therefore, must move away from images of sudden price falls over a very short period (characteristic of the US dot-com bubble). You don't have to be an expert at bubbles to know that if any one firm, trader, or even the US government had the power to stop the Dot.com bubble from bursting, they would have done so. Maltese property market actors, on the other hand, have enough power as it is to influence the market, and they’ve done a spectacular job so far in keeping Maltese property prices from falling dramatically – for better and for worse. Given the changing nature of the market, however, it remains to be seen whether they will manage as successfully in the coming years.

Robert Zammit is currently reading for an MA in International Relations at Warwick University in the UK, having graduated with a first in economics from the University of Malta. This blog is brought to you by InSite, the student media organisation www.insite.org.mt