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.