From the dawn of civilisation, humans have sought dwelling spaces to meet one of their most primordial needs: shelter. Yet over time property came to stand for other socio-economic needs, such as power and status. Some have turned it into a business venture, while others use it to store wealth or as an investment. This is also the case in Malta – with the importance of this industry being further magnified due to Malta’s limited land resource and high population density.

But what is the current situation for property in Malta?

To start with, the Maltese population is inclined to prefer ownership over rent. Eurostat data shows that in 2014, home ownership in Malta stood at around 80 per cent compared to the EU average of 70.1 per cent. In a study commissioned by Remax in June 2015, around 96 per cent of respondents confirmed owning a house was “important or very important”.

A number of Maltese individuals also hold a second residence. Again based on Eurostat data, 18.4 per cent of respondents held a second residence as opposed to the 15.6 per cent of the EU population. Much of these properties are holiday residences or secondary residences. Others purchase a secondary home simply as an investment vehicle.

Property came to stand for other socio-economic needs

Demographic changes have also an impact on property. As the family nucleus changes, with increased ‘single–parent families’ and increases in the number of households, so does demand for housing. The influx of foreigners living and working in Malta has also increased demand, brought about by various factors including the success and need for skilled resources in certain economic sectors, government residency and immigration schemes, and the stable economic and political climate in Malta compared to other countries.

Clearly, this affects certain areas more than others, as evidenced by the rise in rental rates and property prices in such locations as Sliema and St Julian’s. Such areas have also become less affordable for local families. On the other hand, in such a micro economy, a relatively small annual influx of foreigners has an immediate impact on demand, thus requiring more in-depth analysis of underlying trends in demand.

In terms of supply, the amount of vacant properties remains a contentious matter in terms of actual numbers (latest data is based on the 2011 NSO Census) and its implication: environmental groups believe such an existing stock is enough reason for all development permits to be refused, while developers argue that supply might not be as high as indicated prima facie by vacant property statistics since one needs to focus only on those properties ready for habitation and available for purchase on the market.

Following economic theory, the forces of demand and supply should be reflected in annual price changes. In Malta, prices continue to rise in almost all categories. The CBM Property Price Index (based on “asking price”) registered a compound annual growth rate of 4.5 per cent or higher over the last 15 years, depending on the type of property and location. In fact, on a small island like Malta it may be misleading to look at aggregate supply and demand but focus should be by area or type of property.

So what are the true reasons behind such persistent price inflation? One possible explanation could be that property is being acquired for the sake of storing value and eventually making capital gains. This could be the response to high liquidity in the market (as evidenced by increasing bank deposits), the current low interest yield scenario, and reduced opportunities for alternative investments given the small size of the country (e.g. limited corporate bonds and initial public offerings).

The steady price increase of property can be considered to be one of the key drivers of people investing in property, believing that prices are on a perpetual hike and hence returns will be future proof. Behavioural economists go one step further and refer to a herding effect.

This inevitably leads to the most important question: is such an assumption on pricing sustainability realistic? Across the globe price hikes in the real estate industry continue to persist in some countries, while others saw prices slashed leading to various negative repercussions throughout their economies.

While looking at foreign case studies might be helpful to identify economic trends, one could argue that Malta is more likely to compare to cities than countries. For instance, in London, prices continue to rise, with some believing that they will soon drop, while others believing that the influx of foreigners and the limited space will sustain this upward trend going forward. Yet, in such a case, local families are definitely being over-priced in key central areas.

So what about Malta? Are there any concrete economic reasons why prices keep rising? Is historical data a good driver of high prices? Is the pattern of rising prices sustainable in the long run? Discussing such questions would allow us to better comprehend the dynamics of the market and be proactive with regards to any measures needed to sustain it.

EY will be discussing the local real estate market in a debate on Thursday May 5, from 8.30am till 1pm, at Xara Lodge, limits of Rabat.

Keynote guest speaker, Henry Worthington, associate director at Oxford Economics, will also delve into the results of a study undertaken by Oxford Economics on the economic impacts of Brexit.

For more information, e-mail ruth.borg@mt.ey.com.

Maria Giulia Pace and Chris Meilak are economists at EY Malta as part of its economic advisory team.