How a person interprets the news that almost half of banks’ non-performing loans come from the construction and real estate sectors depends on whether they are an optimist or a pessimist.
The pessimist will undoubtedly derive great pleasure in saying “I told you so”. He would point out that far too many people who had no experience in construction and development jumped onto the bandwagon a decade ago, motivated by the double-digit returns that others were getting on their investments.
He would say they forgot that what goes up must come down and that, as more and more properties were put on the market, the more of a squeeze was put onto prices.
This, in turn, instilled a sense of panic among speculators and amateur developers who realised that the sooner they put their properties on the market, the better the chance of selling.
Malta’s horizon was changed forever by a glut of poorly-built, badly-finished, cramped and dismal apartments, many of which were not sold.
The Central Bank’s recent Financial Stability Report for the first half of 2013 showed that banks’ non-performing loans (NPLs) – loans that have gone sour – increased from 8.2 per cent to nine per cent. Not that dramatic, but half of that 0.8 percentage point increase came from the construction and real estate sector.
At 46.3 per cent of the sectoral allocation of NPLs, it looks quite dire. But the optimists would look at another figure: 15.1 per cent, which is the sectoral allocation of loans.
This is an important figure because it shows that the banks were not naive and took quite a prudent view, reading the writing on the wall. The CBM report reminds us that domestic banks would only let people borrow between 63 per cent and 74 per cent of the value of a property.
Optimists will also note that the number of Mepa applications has been declining steadily since a peak of 11,343 in 2007 to 3,000 in 2012.
Of course, the damage has been done but at least the worst is over. The myth that land is finite in Malta and that there will always be a demand for property was burst by the change of policy to allow a third floor (and receded penthouse), the failure of non-Maltese citizens to flock to our shores, the reality that there was already a stock of vacant housing and the inescapable demographic trends which will lead to a declining population in the not-too-distant future.
One area which is still cause for concern – as has been pointed out ad nauseam by credit rating agencies and entities like the International Monetary Fund – is that over 72 per cent of NPLs across the sectors are covered by collateral mainly in the form of real estate.
This is more worrying than the 46.3 per cent as it means banks’ exposure to the vagaries of the property market is not limited by construction and real estate loans but that failures in wholesaling, manufacture and industry might still result in money being uncollected as real estate is only worth as much as it can be sold for – and only if the market is looking for property to buy in the first place. If not, it is just an expensive pile of bricks.
Banks will next year have to open up their portfolios for intense, dispassionate scrutiny. This is when pessimism and optimism will have to give way to realism. We can only wait and hope.