Increases in real house prices in recent years were not excessive when compared to those in other countries, a study on the property market has concluded.

The study by Brian Micallef, research office manager at the Central Bank of Malta, found that after a correction period that lasted five to six years, the housing market started to recover in 2013, with property prices registering healthy growth rates in the two years that followed.

The increase was attributed to a number of factors: a robust economic growth, low unemployment and government policies aimed at stimulating the property market.

The research also refers to the Individual Investor Programme (IIP), which targets high net worth individuals, thus raising demand for high-end properties.

Other contributing factors included an investment registration scheme in 2014, the exemption of stamp duty for first-time buyers on the first €150,000 of their new property value and capital gains tax reform last year, with the introduction of a final withholding tax system based on the value of the property.

Portfolio rebalancing by investors into the housing market was also mentioned as possibly having played an “increasingly important role”, especially in the context of the prevailing low interest rate environment.

According to the Central Bank of Malta house price index, residential property prices rose rapidly in the early 2000s with double-digit growth rates being registered between 2003 and 2005.

The boom in property prices, the study notes, peaked in 2004 and, then, the growth rate in house prices gradually slowed down although it remained positive until late 2007.

As happened elsewhere, prices dropped in 2008 and 2009, partly correcting the previous excesses. The study, however, points out that the drop was “relatively mild”, averaging just under four per cent annually throughout the two years in question. This was followed by “relatively low growth” between 2010 and 2012 and property prices started to recover in 2013, exceeding the pre-crisis peak in early 2014.

Subsequently, house prices maintained strong and positive momentum, averaging 6.6 per cent per annum between 2014 and 2015.

Social and demographic factors are having an important impact on the housing market

A combination of demand and supply factors had led to the boom in house prices in the early 2000s.

Membership of the European Union, the study says, could have influenced expectations about future economic prospects. Also, entry in the ERM II mechanism, two years before the euro was adopted, led to domestic interest rates slowly coming into line with those set by the European Central Bank.

Bank lending rates to households for mortgages fell from 6.6 per cent in early 2000 to 4.3 per cent at the end-2004. Low interest rates impacted positively on property prices, with residential mortgage debt rising from 14.5 per cent of GDP in 2000 to 35 per cent in 2007.

The investment registration scheme, a tax amnesty for Maltese residents with overseas assets effective between 2001 and 2005, played its part too. As a result, many residents often invested their assets in domestic property.

Property development was further encouraged by the rationalisation exercise launched by the then Malta Environment and Planning Authority in 2006.

All this, in turn, encouraged construction. Just to have an idea, development permits for new dwellings units, mostly apartments, almost doubled between 2003 and their peak of 11,343 in 2007. Together with a higher supply there was also a sharp increase in vacant dwellings.

Going by the 2005 census, dwellings increased to 192,314 units in 2005, up 24 per cent compared to a decade earlier. Vacant properties numbered 53,136, or 27.6 per cent of the total housing stock in 2005, up by almost one half (49 per cent) over 1995.

Then, as a result of a global economic crisis, a slowdown in the construction sector and a drop in prices ensued. This happened for various reasons, but mainly supply-related.

Brian Micallef, Research Office Manager at the Central Bank of Malta.

The study found that the adjustment in housing market affected both prices and quantities. Permits for new units dropped by over 50 per cent between 2007 and 2009, amounting to 2,705 units in 2013. Likewise, investment in housing declined from its peak of 7.4 per cent of GDP in 2007 to 2.8 per cent in 2013. House prices dropped in 2008 and 2009, followed by a period of sluggish growth until 2012.

The research highlights the fact that social and demographic factors are also having an important impact on the housing market.

Ageing and changes in the traditional family nucleus, such as the introduction of divorce and more single-parent families, always raises the demand for housing. Also, the influx of foreign workers, up from about one per cent of the workforce in 2004 to more than 10 per cent a decade later, also had a positive impact on demand. This last factor also pushed up the demand for rented property, especially in areas close to main tourism hubs and fast-growing industries, such as remote gaming and the financial sector.

After analysing a number of indicators, Mr Micallef noticed a period of overvaluation in house prices starting from round about the time Malta joined the EU and peaking in 2006-2007.

Some investors could have been tempted to consider investment in property as an alternative to other traditional forms of investment

The disequilibrium started to be corrected sometime in 2008 following a slowdown in house prices.

In his conclusions, Mr Micallef points out that even though house prices appeared to be broadly in equilibrium, the momentum increases could imply that they can go beyond such equilibrium if the trend persists. This, he adds, poses a dilemma for monetary policymakers because macro-prudential policy instruments are mostly effective to address credit-fuelled speculation but are much less effective if boom conditions are not driven by credit.

Asked to expand on this point, Mr Micallef notes that monetary policy is “very accommodative” at present. Since the financial crisis, the European Central Bank cut interest rates to very low levels and also embarked on a number of non-standard monetary policy measures. These measures are intended to ensure supportive financing conditions, thus facilitating the momentum of economic recovery in the euro area and secure a return of inflation to levels below but close to two per cent in the medium term.

These measures are, in turn, reflected in lower interest rates on traditional instruments used by savers. In Malta, the weighted average deposit rate has gradually declined from about three per cent in early 2008 to about 0.6 per cent in the first half of 2016. Also, the 10-year government bond yield went down from slightly below five per cent to about one per cent in the same period.

The low interest rate environment could have incentivised some investors to consider investment in property as an alternative to other traditional forms of investment.

Rising house prices, Mr Micallef remarks, are not driven by rapid credit growth. “For instance, according to contacts with a real estate agent, due to buoyant activity in the housing market, some developers may require less credit from banks as they are selling their property on plan and use the proceeds from deposits to finance some of their expenses,” he says.

The views expressed above are Mr Micallef’s and do not necessarily reflect those of the Central Bank of Malta.