Finance Minister Tonio Fenech does not share Brussels’s concern on the increase in problematic property loans and their impact on the banking sector.
Mr Fenech said Malta was different from Spain and Ireland where house price bubbles burst and brought down the banking sector.
“I have full confidence in our banking sector and their cautious approach when giving out loans,” he said.
The European Commission warned this week that banks could see the quality of their loan portfolio worsen as a result of their high exposure to the property market.
But Mr Fenech said the scarcity of land made house prices less volatile. “I appreciate the Commission’s concern but it is a sentiment based on the reality in other European countries that over-relied on the property market.”
According to the findings of an unpublished research paper by economist Joseph Falzon, Malta experienced a 20-year house price boom that ended in 2007.
Prof. Falzon, the dean of the University of Malta’s Faculty of Economics, Management and Accountancy, said house prices increased seven times between 1987 and 2007. “This amounted to an average of 10 per cent return each year for 20 years,” Prof. Falzon said.
Prices started to fall with the international credit crunch in 2008. The Central Bank of Malta property index registered a drop of almost seven per cent between 2007 and 2011. “It was a minor drop compared to the international declines in the US, Spain and Ireland,” Prof. Falzon said, insisting there was no cause for alarm. Households made a lot of effort to pay their mortgage loan each month, he added.
However, banks had to be careful where big developers were concerned. “A housing market that has experienced a drop in prices increases the risk but the decline in Malta is nowhere near that in Ireland, Spain and the US.”
He explained that a housing bubble was created when prices increased and financial history showed that all bubbles would burst.
“Central banks have the duty of reining in the party not to allow the people to get too drunk,” he said.
Prof. Falzon pointed out that The Economist, an influential magazine, had long argued before the 2008 credit crunch that central banks had to keep in mind property price inflation when deciding on monetary policy.
“It is better to slowly prick the bubble when it is forming then to allow it to grow and eventually burst, causing drastic consequences for the banking sector and the rest of the economy,” he said.
It is a sentiment shared by the Finance Minister. Mr Fenech said the government adopted a cautious approach when developers asked for bigger incentives to get the property market going.
“We adopt a conservative approach not to fuel a property bubble that can damage the economy,” Mr Fenech said, insisting the country had not arrived at that point.
The National Statistics Office yesterday reported that property prices increased by almost two per cent in the first quarter. This was fuelled by an increase of almost two per cent in the apartments index and an increase of six per cent in the maisonettes index.