Joseph Falzon, Wendy Zammit and Denis H. Camilleri published an excellent study on property in Malta, with special reference to housing, under the title House Prices in Malta - An Economic Analysis, in the Central Bank of Malta Quarterly Review 2005: 1.

The authors survey housing in Malta from various points of view, looking at population and household growth, bank borrowing and the resulting purchasing power of single and joint applicants, the affordability ratio, the composition of housing stock, building permits, vacant properties, house loans and property lending, property prices, the rates of return of property and various competing assets such as shares and bonds, and housing stock values versus the Gross Domestic Product.

Mr Falzon, Ms Zammit and Mr Camilleri analyse the data in time-series fashion, often going back to the 1980s, and also do selective, often recent, cross-sectional analysis, comparing figures for a given year, and eliciting the main implications. The paper is well-written and clear and does a lot to promote a proper factual analysis of the property market, to avoid some of the myth-analysis I wrote about a forthnight ago.

What follows are my comments on certain aspects of the paper and quotes are from the Falzon et al paper.

One important aspect which recurs throughout the paper, although not specifically emphasised, is how banks in Malta have throughout the years facilitated and accommodated the property market, reaping great rewards for doing so, as we shall see. The authors show, for example, that as property prices increased, the banks started giving more credit to couples seeking to borrow funds.

Until 1988 the maximum loan was four times the husband's salary plus Lm5,000; in 1999, it was increased to 3.5 times joint income; the repayment period was increased twice, in 1995 from 25 to 30 years, and in 2003 to 40 years. House loans outstanding swelled from less than Lm20 million in 1980 to more than Lm500 million in 2004 at which point total property lending reached Lm900 million and property lending comprised more than 40 per cent of total bank lending, up from less than 25 per cent in 1981. Flipping the coin, one sees the great extent to which banks' loan portfolio depend on a sane property market.

Yet, in spite of this accommodation, the purchasing power of buyers show a generally downward trend, though not an alarming one, certainly not as alarming as some think. Purchasing power fluctuated around in the 1980s, slid steadily between 1988 and 1998, jumped up until 2001 (as the banks became more accommodative) and slid again since then. Single persons were worse hit. In 1985, if they borrowed the maximum, a single person could buy a flat and a couple could buy 1.6 flats. In 2004, the single person could buy half a flat and the couple just one.

If we jump 22 years, we can see the following:

Year Average Flats Maisonnetes Terraced Inflation
Yearly Houses Index
Income
Lm Lm Lm Lm
1982 2,292 14,339 12,934 18,549 432
2004 6,423 52,162 56,997 99,742 665
Multiple 2.8 3.6 4.4 5.4 1.5

The way I worked the multiple here is a little rough-and-ready but it brings across the point. Average yearly income seems to have exceeded inflation but fell short of the price increases of flats, maisonettes and terraced houses, in that order. Interestingly, if one looks at vacant property, as the authors have done, one finds that in 1995 highest vacancies were in flats, 40 per cent of which were vacant, and the situation today is estimated to be worse since the rate at which permits were issued speeded up since 2001.

The authors also produce a table from the 1995 Census showing housing stock. On average, if one deducts summer residencies, 15 per cent of dwellings are vacant. Some of these are in a bad state of repair, others are caught up in ownership or succession problems, so I guess the situation is not as bad as those who advocate tax on property make it out to be.

As I have shown elsewhere, tax on property merely pushes its price higher. In turn, the expectation of higher prices leads to more people holding out. There are many myths making the round on this one.

The authors mention rent laws as one of the reasons restricting supply of housing units. Alternativa Demokratika are seeking a referendum on the question of rent laws. The assumption is that if rent laws are made fair, more people will rent their property out. At the margin this is likely to be true but the reason why people are not renting property out now, in spite of the 1995 amendments, goes beyond the law. As the authors note: "...owners may still be reluctant to rent to Maltese tenants, possibly due to fears that the current legislation may be revised,..." The problem, therefore, is one of institutional credibility. Here too, my little crude model of the "agent of change" comes in handy: landlords (in the minority) do not feel they can trust legislators who represent political parties who ultimately want the votes of tenants and potential tenants (in the majority).

Very interestingly, the paper goes into the returns one would have obtained from other assets for the period 1995 to 2004:

Asset Growth
(compound annual returns)
Housing 8.42 per cent
Malta Stock Exchange Index 10.83 per cent
Time Deposits 4.7 per cent
One-Year Treasury Bill 4.6 per cent
10-year Government Bonds 5.88 per cent

As the authors note, the last three are given for comparison purposes only since they are more liquid and less risky and ought to earn less than property.

Interestingly, the authors state that for the period 1987 to 2004, inflation was 2.5 per cent per annum and this means that since dwelling units increased on average by 10.3 per cent per annum owners enjoyed a real return of 7.8 per cent per annum.

This set me thinking about how much someone who used bank debt throughout would have made. The Central Bank publishes indicative interest rates charged on loans but only until September 2003, when this useful statistic was stopped.

Averaging for the 1987 to 2004 period, I found that the average loan rate was 7.3 per cent, roughly 4.8 per cent in real terms. This means that someone who financed his or her property business entirely by bank debt stood to make a real return of three per cent: the businessperson took 38 per cent of the gains, the bank took 62 per cent.

The three per cent real return left to the businessperson is of course before all taxes. So, perhaps, another myth about the easy money made by these "speculators" can also be put to rest.

The loan rate I quoted was for normal, property development loans of a medium amount. For the technically minded, this could be taken as a proxy for the cost of capital of a business. For individuals seeking home loans, as far as I recall, ever since Lohombus days, there were always special low rates and consequently an individual would have kept more of the gain.

The paper considers various monetary aspects of the housing market because, as it delightfully says, "Every transaction in the real sector of the economy is accompanied by a corresponding one in the monetary sector." This is a simple sounding statement but, believe me, it carries a mountain of economics.

I thought of doing one other thing to try and understand how property shot up in value during the last 20 years or so. Taking 1985 (the mid-1980s) as the start and 2004 as the end, I compared property prices, first, to the total of domestic credit and net foreign assets (which equates to Broad Money (M3) plus what are technically called

"other counterparts to broad money"), take this as a very rough definition of monetary assets and, second, to Broad Money only (currency in circulation and bank deposits). What do we find?

Average Broad Money Broad Money
House plus only
Prices Counterparts
Lm Lm million Lm million
1985 15,368 746 676
2004 86,376 4,230 2,918
Multiple 5.6 5.7 4.3

The multiple is exactly the same! The price of property went up by the same multiple as money. Pump more money in and we get even higher prices. Of course, other demand and supply factors do play a role but money is the kingpin.

After all, if there is a "housing price" problem in Malta it is basically due to average yearly incomes not keeping up with housing price increases, and not the housing price increases per se.

How is money pumped in, here in Malta and around the world and by whom? That's another story, for another day.

pvazzopardi@usa.net

Paul V. Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking.Mr Azzopardi or related parties, including the company, and their clients, have an interest in securities mentioned. This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such.The value of securities, and the currencies in which they are denominated, may go down as well as up.Readers are requested to seek professional financial advice tailored to their own personal circumstances.