Where is the property market heading now?

The property market continues to be the favoured haven for many Maltese in­vestors who combine their instinctive, and often emotional, attachment to property with cold calculations on the possible returns that this market could deliver.

If one were to judge the current state of the property market on the public statements made by property dealers, one could easily conclude that this market has not fared badly in the current economic slowdown and is about to take off once again in the coming months. But is this a fair assessment?

There is no straightforward answer to this question, mainly because the property market in Malta is not transparent: one can hardly find published empirical evidence on actual property price movements for a particular period. Attempts by the Central Bank of Malta to capture property price movements are at best approximations based on advertised prices. We all know that property is hardly ever sold at the advertised prices, but we know far less at what discounts property is actually sold for.

Foreign property markets are more investment based than they are in Malta. By this I mean that in most foreign markets investors buy property for income and resale. They often use vehicles, like investments funds and investment property companies, whose business is to buy and sell real estate for a profit with the intention to sell over a mid to long term (i.e. seven to 15 years).

Foreign property owners are normally not very attached to their real estate. In the UK a home owner is expected to change home on average three or four times during a lifetime. In Malta, it is rarely more than one time.

This makes our sales turnover rather low when compared with other international markets. The cost of buying and selling property is not insignificant and this too, depresses the optimisation of supply and demand flows.

There are, however, clear indications that the present state of the property market is rather depressed as a result of a number of local and international factors. Local banks were partly behind the astronomical increase in property prices in the last decade. Competition pushed them to offer increasingly cheap financing both to developers and to home owners. This fuelled abnormal interest both on the supply and demand side of this market.

Some banks prefer to roll over the overdue debts of developers, rather than liquidate their security. They do this primarily not to damage their own balance sheets too severely, but also to prevent a crash in property prices that would have catastrophic effects on the rest of the economy. Banks’ collateral in Malta is, after all, mainly made up of residential and commercial property. This, in my opinion, partly explains why property prices in Malta have not fallen as much as they have in most other EU countries.

There are, however, other factors that are likely to affect the longer term prospects of this industry. There are unpublished reports that confirm that there are about 50,000 vacant properties in Malta. Not all of these are available for sale. But even if just 30,000 are in theory available for sale, this massive oversupply is likely to depress prices for a long time.

Even if the rate of new permits issued by Mepa declined in the last few years, there are still some entrepreneurs that persist in building new apartments, possibly because this is what they have always done. With the prospects of modest economic growth in Malta and other EU countries becoming more likely, the spending power of both local and foreign potential buyers of property in Malta will probably put a strong lid on prices for a very long time.

As more tough measures become inevitable to rectify the serious flaws in our public finances, it is unlikely that we will see any fiscal incentives to promote the recovery of the property market.

So, while property prices in Malta have undoubtedly not fallen as much as they have done in countries like Ireland and Spain, seasoned investors will probably shy away from rushing back into this market prematurely. For many others there is still a solid opportunity to diversify their investment portfolio by identifying bargains that still exist in this market.

The dynamics of supply and demand will in the long term determine the level of prices, and the Maltese property market cannot be an exception to this rule.

jcassarwhite@yahoo.com