Wednesday, 2nd July 2008
Property prices
I recall a conversation with some friends of mine more than a year ago on the rapidly rising prices of Maltese property. The prevalent mood around the table was that average prices would keep rising between 5% and 10% per annum – as was the trend according to various economic reports on the matter. Some other friends, however, argued that it was only a matter of time before the Maltese property market witnessed a dramatic fall in prices, typical of the proverbial bursting of an asset bubble.
I recall thinking that both hypotheses were probably right, but only to a certain extent. I put forward my own thoughts about how the price movements would develop: prices would continue rising, but at a decreasing rate, after which they would stabilise, remaining relatively fixed over a period of years.
A year and a few months following the abovementioned conversation, the Central Bank of Malta’s latest Quarterly Review (Pg 30, if you're interested) has confirmed that average property prices have, over the last year, flattened out. The word average is key, here: prices of finished maisonettes, for example, have fallen by 5%; townhouse prices have fallen by 16%; the price of villas, on the other hand, has risen by 7%.
On average, though, property prices have risen by only 0.1%, which is in stark contrast to the relatively high increments seen in previous years. The National Statistics Office’s figures – though at a slight variance to the Central Bank’s findings – also show a significant slowing down, with the all-property price index registering no double-digit growth between 2007 and 2008 (albeit for one exception – November 2008, though you don’t have to be a rocket scientist to know why that happened).
Where does the market go from here? Nowhere, quite frankly. On the one hand, there doesn’t seem to be much pressure for prices to rise further (as shown by recent property discounts, for example). On the other hand, there is also little potential of a sudden dramatic fall in property prices typical of an asset bubble burst. I will attempt to give three reasons as to why I believe that there shall be no general property price crash in Malta.
My first point relates to what economic theory refers to as demand elasticity; in other words, how easy it is for buyers to substitute one commodity for another. Housing, in this regard, is extremely demand inelastic. Property has almost no substitutes, unless, that is, you’re willing to start a home in a tent (or, on a more serious note, put up with Malta’s outdated and impractical rent laws). Some prospective property buyers may very well be able to delay purchasing property; very few, though, have the luxury to postpone their purchases indefinitely. This is especially the case with first-time buyers, many of whom are newly-married couples not particularly intent on hanging on to their parents.
A second set of factors slowing down the fall in average house prices is foreign demand for Maltese property, as well as increased incomes on the part of Maltese individuals, including, in this regard, the recent property splurge in the months running up to the introduction of the Euro. These factors explain why the price of villas and townhouses keeps rising whilst the price of other housing categories falls.
The third factor relates to asset bubbles. There is, as of yet, no clear explanation on the formation and bursting of asset bubbles. Having said that, what is a fact is that asset bubbles predominate in markets with high volumes of both buyers and sellers. Though there are certainly plenty of prospective buyers in the Maltese property market, there are far less sellers, and many of these are agencies colluding tacitly with one another (following one another's lead, for example). In other words, therefore, individual buyers and sellers on the Maltese property market still exhibit considerable control over movements in prices, and thus have a say in how prices fluctuate.
Talk of Maltese property prices ‘bursting’, therefore, must move away from images of sudden price falls over a very short period (characteristic of the US dot-com bubble). You don't have to be an expert at bubbles to know that if any one firm, trader, or even the US government had the power to stop the Dot.com bubble from bursting, they would have done so. Maltese property market actors, on the other hand, have enough power as it is to influence the market, and they’ve done a spectacular job so far in keeping Maltese property prices from falling dramatically – for better and for worse. Given the changing nature of the market, however, it remains to be seen whether they will manage as successfully in the coming years.
Robert Zammit is currently reading for an MA in International Relations at Warwick University in the UK, having graduated with a first in economics from the University of Malta. This blog is brought to you by InSite, the student media organisation www.insite.org.mt
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Comments
Mr. Vella also raises some interesting points. Construction as an industry takes time to adjust to price changes, and projects will continue appearing on our media, even as price rises stabilise. Moreover, I referred to in my article to foreign ownership of luxury properties as well as the higher incomes of some population cohorts, which I believe are still important factors when analysing the prices of high-end housing. These two factors – and others - continue to exert upward pressures on prices of some housing categories.
The fact that housing categories are split up according to maisonettes, townhouses, apartments, and villas reflects, I believe, a somewhat outdated way of defining properties, since, as rightly stated by Mr. Vella, one very often comes across apartments costing more than villas. I believe a better way of understanding the market would be to divide properties according to value, and not just physical features. This would go a long way to reducing what economists call heterogeneity – that is, the fact that what we call a ‘townhouse’ at this point in time may very well imply a converted 400 year old house of character, an unconverted fifty year old townhouse, and anything in between!
I use the term ‘commodity’ in the purely economic sense; that is, a product that can be bought and sold. I use it for want of a better term, since in reality what we refer to as housing is, in reality, a number of different categories – each responding to its own particular demand and supply considerations.
That property prices are influenced by bank lending rates is assumed – though what is not assumed is the direction of that influence. An interest rate rise influences housing in various ways. In the immediate term it may push prices up as consumers and lenders factor in the higher financing costs, if I’ve understood Mr. Bartolo correctly. In the longer-term, though, prices may fall as consumers – deterred by higher loan financing costs – reduce their investment spending (that is, they buy less houses), and lenders reply by lowering prices, as I believe is happening at the moment in some housing categories.
With your same arguments, the variety of these apartments means that they well compete in all sectors of the market. Whilst you mention the concept of demand elasticity, and then split up the market into segments according to construction type, the reality is that the person looking for a EUR400,000 villa is also the same person that looks at a EUR400,000 apartment.
It's all in the numbers.
My point is, with this many varied construction projects currently in phase, are you sure that your prediction that the market will remain at a flat average point is not a flaky one?
I don't think property can qualify as a commodity. The value factors which are given to commodities in prices differ from those of property. For example empty property without buildings do not have any labour value but only a geographical+resource value, property is not produced etc... But the biggest difference comes in terms of the utilization of capital. The property market unlike the industry grows through an acummulation of financial capital and not through industrial or productive capital and thus property prices are heavily influenced by banks. If the interest rate has increased (as it has done recently) than property prices will also increase because the amount of capital advanced to property investors by banks, must be returned in higher sums in longer time. So the propensity to lend is I believe a very important factor effecting the property market of Malta. Sorry due to a world limit I can't elaborate!
(N.B.: With respect to my original article, I’ve noted a slight misprint in the fourth paragraph: ‘November 2008’ should read ‘November 2007’. Apologies)
The same applies to villas, unconverted townhouses, maisonettes, and small flats, which are all in reality different markets. It is important therefore to keep into consideration that the development you mentioned – and any other development project, for that matter – may only lead to upward or downward pressures on prices in a specific housing category – and not in others.
Is it going to remain possible for sellers to keep prices up even in the face of developments like Mistra, which will add 800 new properties to the market? Will the large amount of properties ever push prices down?
What happens if prices go down?