Editorial

Discussions on the state of the property industry often centre on how property prices impact developers, investors and economic activity in general. But there is another perspective to this market that needs to be discussed. This relates to those who are trying to get on the property ladder for the first time or want to trade up by buying a better residence.

The Central Bank property index has confirmed that the property market has not been spared the negative impact of the current economic slowdown. In the first quarter of this year property prices have fallen by almost 10 per cent over the same period last year. While this is bad news for developers and those who have bought property as an investment, it is certainly good news for first-time buyers.

In the last few years those seeking to buy property for its traditional purpose - a place where to live and bring up a family - have slowly but surely found that housing affordability was becoming a mirage. This is not good for the economy, not good for society and not good for the individuals trying to set up a family.

The role of banks in fuelling the recent property inflation has yet to be examined more thoroughly. In the last several years, as investment in manufacturing and tourism started to show increasingly diminishing returns, banks were very eager to support property development projects to hit their profit targets. Short-term profitability and increasing competition meant that most property development projects got the green light for financing.

On the demand side, banks were equally liberal. Most people in employment were almost guaranteed financing for at least a type of property that the banks considered that a particular customer could afford to repay. The banks themselves fuelled demand by promoting "buy-to-let" property schemes, in some cases even providing 100 per cent financing at relatively low interest rates.

In the last few years the property market grew too much too fast. A market correction was therefore overdue and the consequences of this have to be accepted as part of the price of operating in a free market economy. Whether prices will continue to fall further or stabilise is still uncertain.

It is a well known fact, also confirmed by the CBM Quarterly Report, that property investors would rather wait than sell their property at a price that is lower than what they expected to get. The reported 21 per cent drop in the number of advertised properties in the first quarter confirms the downside pressure on prices that is keeping potential sellers from entering the market.

The massive overhang of vacant properties is another factor that could exert further downward pressure on property prices. It is estimated that at present there are over 55,000 vacant properties, most of which could potentially be available for sale.

Some estimates predict that this figure could almost double by 2015 if the current rate of building permits remains consistent.

As the economy starts to recover, there should be a normal increase in demand for property from first-time buyers and those trading up in this market. The more prudent approach being adopted today by banks in financing property development and the large stock of vacant property will mean that any price increases will be gradual and nowhere like what they were in the last decade.

Such a recovery is healthy because it discourages speculative investment and ensures that housing affordability is within the reach of most people.