A future cast in stone

International TV news stations have often screened features on the property market in Spain. Graphic shots showed how this market crashed and forced Spanish politicians to beg for assistance to the EU as banks became gravely undercapitalised as a result of exposure to this market. The Spanish economy, just like the Irish economy, was up to a few years ago used by economic journalists as a model of how to promote growth and create jobs.

After a few successful bank stress tests when things looked quite rosy, Spanish politicians now realise how in the case of Spain the property market in the last two decades has weakened banks rather than created wealth. Similarly the Irish government was forced to nationalise its major banks at taxpayers’ expense dragging the economy in the deepest recession the country has experienced for a very long time. And it seems the worst is still not over.

A recent report by Deutsche Bank has revealed some very disturbing figures about the future of the property market in Ireland. According to this report, Ireland with a population of 4.4 million has 289,451 empty houses, including 60,000 vacant holiday houses. This amounts to 15 per cent of the residential property stock. This glut of empty homes will have a major impact on future property prices. “Demand for housing is the key factor as to how long it will take for this oversupply to be reduced, and aside from demand for second homes the key driver should be population growth,” Deutsche Bank notes. If holiday homes are included in calculations, the oversupply will take 57 years to clear.

These comments cannot but help us focus on our own property market which is undoubtedly different in some ways, but still subject to the cruel law of supply and demand. In Malta, with a population of just over 400,000, we have an estimated oversupply of between 50,000 and 70,000 vacant properties. This is about 25 per cent of the residential property stock. The IMF and the European Commission as well as rating agencies have very diplomatically, but unequivocally, pointed out that the exposure of some of our banks to the property market could be a cause for concern.

We do have some strengths that other countries like Ireland and Spain may not have. It is a well known secret that many developers have deep pockets that enable them to withstand the present drought in sales for quite a long time. Banks are also more inclined to roll over overdue debt, even if they are no longer inclined to provide fresh finance for new projects.

But a quick tour of the island will reveal hundreds of property development projects that seem to have stalled. Estate agents admit that thousands of properties are simply not of a sufficient quality to sell readily, while there is a shortage of premium properties for which demand is still buoyant. Mepa continues to issue permits adding to the potential oversupply – presumably on the pretext that it is not its responsibility to balance supply with demand whatever the economic consequences.

Developers understandably clamour for fiscal easing measures to boost demand. No one seems to be interested in curbing supply, possibly because some still believe that short-term economic activity is more important than long-term economic stagnation or, even worse, contraction. Banks hesitate to heed the IMF recommendation to increase provisions for non-performing loans as this would affect their short-term profitability and the way they are perceived by their shareholders and public opinion.

One hopes that in the next few months a proper analysis of the property market is made and which highlights the risks that it poses to the rest of the economy. Some of us keep living in denial in our unshakeable belief that investing is property is always a winning formula, and the equally dangerous fallacy that in Malta we are immune to the cruel economic rules that apply elsewhere.

In Ireland NAMA – the agency that has taken over the rotten assets of the nationalised banks – has informed Parliament that “200,000 houses would need to be demolished in order for the housing supply to fall to three years of current population growth”. NAMA boss Bendan McDonagh told the Irish Public Accounts Committee that the state agency “would consider bulldozing properties in certain circumstances, but that this would not be the first option”. This bulldozing has now started.

One just hopes that, unlike the Irish, we will never have to think the unthinkable.

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