They doth protest too much! We have repeatedly been assured by experts that we are not in the middle of a development bubble (even if the MDA report remains unpublished and cannot be analysed), but that was never really the question. After all, a bubble is only really a bubble when it bursts.
A bubble has been defined as “a surge in asset prices which is unwarranted by the fundamentals of the asset, and is driven by exuberant market behaviour”.
That there has been a surge of property prices is undeniable. Central Bank of Malta statistics report a 25 per cent increase between 2013 and 2016, but this is not necessarily unprecedented.
What are the “fundamentals” of an asset? Presumably, one fundamental is the income that is likely to derive from the asset. Therefore, one could argue, as long as selling prices, pushed upwards by rising rentals, are lower than the average purchasing power, we are on to a good thing. However, some skepticism is legitimate.
A newspaper has recently reported that the rise in rental prices in Sliema, between 2010 and 2016, was of the order of 80 per cent. Is this sufficiently “exuberant” market behaviour? The fact that Malta was recently cited as being in second place in the global buy-to-rent market league is not necessarily a fact to celebrate.
The ‘average’ purchasing power can be a misleading metric. As the high-end salaries paid, especially to foreign workers in specific sectors, increase, a rising average purchasing power does not mean that the salaries at the lower end are not getting relatively lower.
The question is, therefore, whether the gap is widening between those who can afford the current market prices and those who cannot. Whether we are in a bubble, or whether this is steady growth fuelled by rich foreign demand – which is probably transient – people at the lower end of the market will find it increasingly tough, and will be forced into smaller and lower quality properties.
Even worse, if asset values were scaled down suddenly, because we are miscalculating our economic sums, it will be the people at this lower end of the market who will suffer most.
The real issue is affordability, a problem of admittedly global dimensions. The industry lobby, with not a small hint of cynicism, has proposed that developers should be given permission to build more floors, and that the planning and social gain will, in this case, be the availability of more ‘affordable’ housing.
The fact that Malta was recently cited as being in second place in the global buy-to-rent market league is not necessarily a fact to celebrate
Is the plan, therefore, to flood the market with residences until prices drop? And to ruin the country in the process?
There is a tenuous link between market rents, and both the cost of construction and the intrinsic quality of the property. How could any additional floors be guaranteed for social housing – in the same way that additional hotel floors did not subsequently become residential apartments?
There seems to be a significant number of properties that could not be sold on the open market at current prices. In fact, the government recently announced that, in just six weeks, there were 200 applications to “offload” properties onto the social housing market – presumably because they could not get any viable offers on the free market. But affordable housing is not the same as social housing.
One could argue for or against height limitations, but height limitations are not ‘penalties’ which can be waived, if one is good, and demonstrates a social conscience, or offers a ‘social gain’.
The planning objectives behind height limitations should be specific: shadowing, aesthetics, heritage preservation, urban quality, skyline – factors that are not invalidated by market conditions.
Therefore, height limitations are either in place for a good reason or they are superfluous. If there were any benefits accruing from height limitations, then they should apply to hotels, as well as to old peoples’ homes, as well as to social housing.
Furthermore, to promote the building of additional floors more than current planning policies allow “albeit within existing planning parameters” is clearly a contradiction in terms.
A prominent economist has recently acknowledged that, although he is of the opinion that we are not in a development bubble, Malta should put a stronger “reliance on planning rather than on market forces”, if we wish, that is, to ensure that our country is not destroyed by its ‘economic success’.
It seems to me that all this denial of development bubbles happened because, after a period of relative fasting, we have been stuffing our faces, and consequently we are (secretly) worried about an increasing feeling of nausea.
The cure for this condition, this nausea, is not to stuff our faces even more and to provide sickness bags, but to eat less and more slowly.
Alex Torpiano is an architect.