Monday, 1st September 2008
Housing much harder to afford
Buying a house has become significantly harder to afford over the last few years as prices have risen sharply while disposable income remained relatively constant, according to a paper published in the latest edition of Bank of Valletta Review.
"Escalation in house prices coupled with sluggish income growth suggests that affordability is becoming a problem in Malta," says author Joseph Darmanin, an economics officer in the Financial Stability Office at the Central Bank of Malta.
This, he adds, is leading to serious concern over future movements in the housing market.
Using Central Bank data, Mr Darmanin concludes that in 2007, median house prices were eight times greater than the average income per capita. In 2000 they were only six times greater.
Mr Darmanin used an internationally recognised method to calculate the affordability of houses for various income groups and household categories. Apart from house prices and income levels, this takes into consideration factors such as mortgage rates and banks' down-payment requirements.
He found that overall, housing affordability deteriorated significantly between 2004 and 2006. The decline, which started in 2000, was partly due to the sharp hike in house prices in relation to a relatively constant level of disposable income.
The only exception was in 2003, when cheaper interest rates and a slight increase in gross household income contributed to a small improvement in affordability.
The general escalation of property prices, he says, has potentially reached an unsustainable level from a socio-economic perspective.
"This inevitably results in first-time buyers gradually feeling pushed out of the housing market, with social housing assistance sometimes being the only safety valve available for low-income households. The rental market in Malta is still undeveloped and restricted to particular segments of society."
Mr Darmanin highlighted a number of factors that might have influenced the rise in house prices. Besides demand and supply, he pointed to demographic changes, consumer tastes and habits, changes in social conditions, the availability of land, and production services in the construction industry.
Real estate developers, who saw property as an investment for future capital gains as well as a source for rent, also contributed to the soaring prices.
The change regarding income tax on funds invested overseas could have instigated Maltese investors to liquidate those investments and return them to the local economy, using property as a place to store their wealth.
Mr Darmanin also says that government measures aimed at subsidising the cost of housing often help to increase prices in the private housing market. "Government policy may impinge on house prices through other channels such as the rent law."
The significant deterioration in housing affordability poses "a serious concern" on the possible future movements of house prices. And the fact that low interest rates have served as a cushion to affordability may heighten further the potential risk of interest rate increases, he adds.
"Consequently, future interest rate movements are crucial to affordability, while property prices growth, as expected, remains of central importance for housing affordability and financial stability."
According to the National Statistics Office, in 2004, 77 per cent of households owned their dwellings.
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Comments
What makes you so sure that the same laws of economics do not apply on our Island?
I don't give a toss about properties aimed at foreigners coming here who are 'first time buyers' waving wages triple mine right now.... My concern is how I'm going to survive & keep my home at this rate. I am sure there are others in my situation who worry that their children will be unable to buy so much as a bedsit in future. For those not fortunate enough to have been born into wealth we'll possibly see a "back to the middle-ages scenario" unfold here, as more & more of our kids will marry but remain at home to share costs.
First time buyers beware: don't get fooled. We all know the bible teaching is well heard and practiced by the banks : 'To those who already have we will give even more and those who have very little we shall take even the bit that they possess to give it to those who already have'. By the way there is no such a bible. But it is no secret that banks are not social workers. The lend to those who have and can pay back with interest! We all know that It is more difficult to become a first buyer than a second time? It is only the obligation of the goverment of the day to regulate the market and insure that artificial distortions are minimised, the rest is up to the market forces to determine the affordability! A well thought rents law reform will be a step in the right direction. Having paid rents ever since I stepped out my parents jungle village home, with the rents paid, I would have bought several houses. I cannot blame it on the government or the market forces: I was not lucide enough! Shame on me!
Interesting. Has any study been done to bisect how much of these 77 % still paying loans to the bank and technically speaking they are not owners of the said property. There are even pensioners caught in such a bracket. And the plight of first time buyers is worst, because it is not so easy to pay around 300 euros a month to let an apartment. I think common sense will push said couple or whoever to get a loan from a bank and after 30/35 years this property , hopefull, barring any mishap or legal actions from the same bank, will be theirs.
A balance solution is very much needed in the best benefits of first time buyers, landlords and even tenants. All should be put in its right perspective with no injustice suffered by no one and the Government carrying a share of the burden.
However, as opposed to the deregulated credit market in the US, which has seen these competitive pressures spiral out of control and where banks have lent to the sub-prime market, in Malta banks do not lend sub-prime and are responsible lenders. They will lend an industry-accepted percentage of gross salary, averaging 25% of salary, and maybe more if the person earns more. They will request a 10% deposit as margin, and require that the person's income is secure.
Extending the loan period to 40 years obviously increases the amount of credit one is able to avail, but who is the real culprit?
Let me tell you. People who enter the Bank and demand to know the maximum amount of loan they can take, and basing their property search on that. If it's cheaper, the don't consider it - they want the best. Talk about a motorcycle nation with a cadillac mentality!
Malta properties are expensive! For the price of an average flat in Malta you can buy a villa in Spain, Marocco and other emerging countries. Who is the foreigner that will buy in Malta? Comeon..you are living in space. Look what is happening in Spain. Many developers went bankrupt, prices are falling drastically yearly with little sales. USA is the same etc. UK soon.
In Malta we are building playmobil flats that are not adequate for dogs imagine for a couple with kids. You need to waste a lot of time to find a good property value for money - that is really worth the money and not being taken for a ride by property owners and agents! "Luxuries..." and then you go and find that is empty. "Larger than normal..." and then you realise that is 70square meters. Some owners even go to the extremes of inventing numbers.
It happened to me last year that the property was advertised for 320square metres. Then after calculating area it resulted 180! wow...3car garage and it was 1car and a half!
Malta will explode soon...properties will crash..and banks will need to face bad loans. And then? Another Northern Rock maybe?
They say it's a buyer's market, however it's a vicious circle with so many potential buyers not able to sell,. Isin't it?
@ everyone else.......the property market in Malta is very segmented - much more so that we realise. For instance, there is an absolute glut of apartments in the 105000 - 220000 euros bracket, but upmarket properties in upmarket developments are still selling well. Same goes for villas, houses with land etc. And rightly so - supply and demand again! One other point.......is it ASKING prices that are falling, or VALUES? They are often quite different.
Mr C Cassar states that we don't have the right to property ownership because we wouldn't be able to afford it (unless the bank wouldn't have covered the cost). I disagree. We work hard, pay all of our taxes, am law-abiding citizens and I guess this earns us the right to own property in our home country should we want to. Mr Cassar's attitude gives the impression that he feels superior to most of his fellow citizens. Why? Good sales to East-European buyers...?
Negotiators are of the opinion that this is a "buyer's market". You should see what there is for sale. Pigeonholes! Isn't there a minimum size for rooms? What is it with these minature combined kitchen/living/dining "rooms" in open-plan properties? Not to mention the rest of the rooms! Of course upgrading to a house is out of the question.
Secondly, our parents generation would normally be able to upgrade from an apartment to a house. Nowadays, unless you are a business person or getting financial help from family, this is practically IMPOSSIBLE!
Of course this is a free market, but with a great dose of speculation and distortions. Malta's land is limited, and all this can only destroy it. I totally agree with Mr. Paul Smith.
Some Maltese people can only think in economic terms. The economy is there for us, and not the other way round.
the pride of owning a place can be compared to the pride of having a job you like but unfortunately in Malta the wages tend not to reflect the merits or difficulties of a proffession and there goes the happiness and pride...
I am seeking to buy a property lately as i am a first time buyer but with the exagerated prices it is not worth! let's say i pay €120,000 for a flat, as shell, paying around €500 per month for 40 years with disposable income being reduced drastically and how can i finish the property? Furnish it with the peanuts im left with?
In my opinion, not only prices are overpriced, but with this property boom of high prices and very low sale of property rate in relation to supply we are ruining Malta. The large amount of developing sites in malta building hundreds of flats with no real demand is ruining our enviroment. Mepa is approving all these sky high properties to be build without proper managment and study to check if there is demand for all these flats and maisonettes that are being build! It was better to tackle unused property rather than approving these new developments and invest in more gardens and picnic areas!
Therfore, The boom in maltese house prices has ended
Can anyone from HSBC acknowledge this, i'm sure the chairman can - Mr. Cassar!
@C.Cassar
Of course the Eastern Europeans you mentioned can afford to buy property @ 250k and even higher in Malta cause for them its an easy way and place to wash their dirty money but this will have to finish soon, as the EU already opened a case against the Maltese Goverment to ractify the present laws re money laundering and make them to EU standards, and what about other so called cheaper properties ie. in the area of 100k is still a lot of money for 1st time buyers(consider that to repay it on 25yrs you pay 200k adding interests ) who is going to buy them if the banks decides as this report suggests to retrain in lending high sums?
Come on lets call a spade spade!!
Wake up mr. cassar, this is the real world, not Disney world!
The last time i brought and sold property in Malta there where no foreign tourists lining up to snap up property.
PROPERTY IN MALTA IS OVERPRICED and of bad build quality, there is also an abundance of unsold property, Mr. Cssar, some basic economics for you: A house is only worth as much as someone is willing to pay for it, now how many empty properties are there in Malta? Cant be long before the banks start calling in their loans!
Unless real wages double in the next few years, very few apartments will be sold and as the global economic slowdown starts to have a deep impact on Malta just like we are now experiencing in other parts of Europe, all the people that jumped on the property developers band wagon like they did in Ireland and the UK building apartments will be in big trouble.
Malta also being a resource less country will year on year, experience punishing energy fuel bills.
High house prices are good for know one, they stifle economic growth as would be buyers are unable to get the loans, they are inflationary as they increase the money supply because any honest banker will tell you money is created as debt and they stop people moving up the ladder.
Malta cannot run it's economy purely building and selling apartments to each other, we have tried that in the UK, you should see the mess we are about to reap!
These people also spend alot of money on the island, so I think you should get over it really. This is the market in Malta and it's here to stay. Renting is cheap in Malta so why should people assume they have a right to property ownership anyway? It's not written in law. If you can't afford to buy - rent. Problem solved.
The prices of houses and apartments should reflect the economy and wages growth in a country and banks should more than know that before lending huge sums of money to people!
During the last 10 years this didn't happen in Malta sure! Now that the purchasing power is going more down because lot of factors such as high fuel and surcharge prices people will sure find it more difficult to keep their commitments such as house loans! Go and ask honest bankers and they will tell you how much people are 2 or 3 months late in payments.
I agree with you Paul Smith. When you inflate a balloon too much the risk is that its burst leaving you injured or scared! This already happened in countries like Ireland where prices fell by around 10% during the last year although the wages are 3 times better than Malta and property prices are just roughly twice in places like Dublin, and in some other County you can even buy a 3 bedroom house for around 230,000 euros!
Whenever any of my relatives or friends seek my advice I always propose that they make an offer at least 20 per cent less than the asking price,remain firm and make the offer to a number of sellers. My experience is that In quite a short time one of such sellers has accepted their offer.
For while nobody from the estate agent and housing community dare say so this is a total buyers market and the the true reality is that those who want to clinch a quick sale have to accept a substantial price cut.
House prices should reflect income 3x income otherwise the poverty gap widens and widens.
House price inflation has simply got out of control in Malta and also helped to destroy the enviroment.
and should not be delegated to those who's properties are not earning a fair rent because antiquated government rent rules dating back to the last century !!. Maybe this can hasten the convertion of the green paper on rents onto a fairer method of charging for rented property
and the rules related to tenants and rent books.
Tony Berkeley
What burden in terms of loan debt are these households collectively shouldering.
What is the total profit that local banks are reaping from this demand for house loans by maltese householders?
Is the government also profiting indirectly by receiving income ensuing from the process and tax deriving from house loans to maltese householders ?
How come you forgot to mention this, Mr. Darmanin?????!!!!!!!