The Central Bank’s warning that banks are facing heightened credit risks due to declining property prices has prompted developers to renew their call for the government to carry out a legal and economic study of the property market.
“This is the end of the myth that property prices never go down in Malta. They do go down. And unfortunately the government is still taxing property transfers as if they are being sold at the high prices they are advertised,” said Malta Developers Association President Michael Falzon.
“The bubble is deflating rather than bursting but we have to manage the deflation. The government needs a holistic policy which gives due attention to the position of the banks. Without such a study, we don’t know if the government’s policies are right or wrong.”
The MDA has been asking the government to study the sector properly for a number of months but the report published by the Central Bank last week highlights the need to examine the banks’ exposure to it.
“The security of all the banks in Malta depends on property,” Mr Falzon pointed out, adding that banks were now finding it difficult to sell property at the desired prices after seizing it from loan defaulters.
Mr Falzon admitted that the situation in Malta was unlikely to end up like that in Ireland, Spain and Portugal because Maltese banks were more prudent and the situation was not dependent on one or two developers.
However, there are a number of factors that were causing property prices to drop.
Malta now had fiercer competition in the foreign buyer market, with affluent foreigners finding better offers in troubled but Mediterranean countries like Portugal and Spain.
There was also the problem of “overabundance” of properties, creating a buyer’s market that was pushing the price down. The situation was particularly bad in “middle” market.
“There is still a demand for the low-end properties of first-time buyers. But people who normally move up the scale in life and buy villas or semi-detached villas are finding it harder to make that move.
“There is less money in people’s pockets so everyone is postponing that decision.”
Mr Falzon said one of the consequences of this downturn was that people were leaving the construction industry for lower paid jobs like those in the tourism industry.
“On the government statistics, unemployment is not being registered but socially, when people move to lower paid jobs, it’s a big social problem.”
The MDA has suggested a study which would examine the stock of vacant properties, foreign markets, the local market, the banks and the legal framework.
Specifically on banks, the MDA says the government should propose ways to isolate any potential defaults, estimate the exposure of the banking sector to the construction industry and classify outstanding loans according to size and type of client.
The latest Central Bank’s Financial Stability Report, published on Saturday, earmarked the property market as a cause for concern as more residential dwellings were coming onto the market when demand was low.
Thirty per cent of bank loans were backed by commercial property, the report said, adding: “The slowdown in the property market, reflecting an ongoing structural adjustment, raises the credit risk associated with these projects. In particular, additional supply of housing units may extend the period of lull in property prices.”
The Central Bank warned that it was unlikely that the property market would return to buoyancy in the short to medium term.
Survey results from real estate agents indicated that house prices remained overvalued, although by less than what had been perceived the previous year.
Meanwhile, this month Finance Minister Tonio Fenech told Parliament that a number of new schemes were being planned to replace the defunct Permanent Residents Scheme, which served as an incentive to foreigners to buy property here. A consultation process is to be launched.