Whenever international students and colleagues ask me whether the economy is good in Malta, I cannot but answer that it is good, especially when compared to the rest of the Mediterranean. I go on about employment levels, standard of living, pastizzi, pastini tal-lewz … – to which the reply is “why are you here then?”. But that is a different story altogether.

A Nationalist might look at my name and snigger. An 80s child named Dominic? Of course he would say that. But I was made to believe that I was named after St Dominic of Valletta, and there’s no denying the numbers indicate that Malta is doing well.

Statistics look healthy. But the thriving economy has had a nasty side-effect on property prices, which have shot up.

Many argue this must be a bad thing. They note that prices have risen despite an increase in supply, with empty properties and new properties joining the market. Rising prices cannot be due to house inflation pushed by an increase in need or demand, they argue. Property prices have also been increasing at a higher rate than median salaries. Join the dots, and it looks like a typical boom-and-bust scenario.

INTERVIEW: 'I don't see a property bubble,' says BOV CEO

But is it? Maybe it is a good sign after all. In this short article, three boom-and-bust scenarios from the past are considered. The 2007/09 crisis is skipped altogether because it may have not yet been fully understood. To understand the present, we’ll have to go old school.

The typical example of boom-and-bust caused by irrationality is the 17th-century Tulip-mania in the Netherlands. To cut a long story short, everyone began trading tulips before they had even flowered. A tulip ended up costing as much as a house. Needless to say, it all went haywire.

The second example is the South Sea Bubble, when the British joint-stock company’s stock rose to dizzying heights before crashing down. Word limit constraints mean you’ll have to Google it to learn more. But again, things went south and even Sir Isaac Newton, the genius who at the time was also heading the Mint, lost all his fortune putting into context his quote “I can calculate the motion of heavenly bodies, but not the madness of people”.

Tulip-mania brought the Netherlands crashing to its knees... but rival Spain suffered too. Photo: Shutterstock

The final example is the 90s dotcom boom, when investors threw money at anything internet-related, even if it was ridiculous. Most of the half-baked ideas failed, pushing the NASDAQ down by a significant amount.

These are all cases of irrational expectations of profits. Most descriptions focus on ‘the greater fool principle’ – that is if you find someone else foolish enough to pay more, then you are doing fine. Yet, there was some truth in all three cases.

The Netherlands managed to hobble the Spanish army and followed their Tulip-mania ordeal with a century of significant trade. The South Sea bubble was focused on Britain’s rising power and trade in America, and in the following years the country did in fact become a superpower and America a formidable trade area. As for the dotcom bubble: the internet isn’t exactly a failed technology – you are probably reading this online not in print.

Even the great Sir Isaac Newton found it hard to predict human (ir)rationality. Photo: Shutterstock

In all three cases, investors had a good sense of things: they wanted in on Netherland’s success, British supremacy, America’s rise and the internet’s effect on our lives. They just chose the wrong product and followed the crowd.

How does this relate to Malta?

Back to Maltese property prices. At a very superficial level, we can state that people speculating in property believe in the economy. Whether it is a boom-and-bust or not, anyone topping up her/his loan to purchase a second property to rent out on Airbnb is giving their certificate of support to the government and its economic stewardship.

But note the term ‘superficial’. A deeper understanding of why property prices are rising is needed. Hopefully this is nothing like the Spanish property boom.

One disclaimer though. Growth and success, in general, do not necessarily mean that the majority are better off. Early 20th century Britain may have been the world’s richest empire at the time, but inequality within UK society was possibly at its widest-ever point. This led to new political thoughts gaining traction – even extreme ones.

Dominic could have easily been a Neanderthal. However, they had no need for actuarial skills (neither does Malta apparently), so he had to settle for the 21st century. He wrote this article before the general election but feel free to shout abuse @domcortis