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Signs that rental property market is ‘overheating’

Only apartments affordable for households that need mortgage

Though there does not seem to be any substantive evidence of a housing bubble, there are signs of overheating particularly in the rental market, a KPMG study has warned.

Commissioned by the Malta Developers Association, the report focused on the construction industry, its economic contribution as well as major trends in the property market.

Its findings were presented this morning during a national conference organised by the MDA at the Excelsior Hotel.

It transpired that the total output of this industry on the economy is estimated to be in the level of €2.55 billion, while the total employment generated is that of 37,275 jobs. The report also concluded that this sector has the highest multiplier effect among all industrial sectors in Malta with a rate of 1.7.

The largest potential threat existed in the rental market, as rents are increasing at a faster rate than property prices, with demand originating predominantly from expats

One of the core issues addressed by the study was the risk of a housing bubble – the term used in situations whereby house prices are inflated by an increase in demand coupled with speculative buying which further increases demand.

According to the study from the available data, and qualitative input received from various MDA members following consultation meetings, there does not seem to be any substantive evidence of such risk.

“Nevertheless, there are indications of overheating and the situation must be monitored closely” the study concluded.

It pointed out that the largest potential threat existed in the rental market, as rents are increasing at a faster rate than property prices, with demand originating predominantly from expats.

“Such market is more susceptible to changing economic conditions, which may, in turn, affect property prices,” the report remarked.

The analysis also focused on housing affordability through a special index - the ratio of the median monthly net household income, and the required level of income needed to qualify for a mortgage to purchase a median-priced property.

A housing affordability index of 1 indicates that a household has enough spending power to purchase that kind of property through a mortgage.

According to the study the results are as follows
• 1.0235 for apartments
• 0.9223 for maisonettes
• 0.7853 for penthouses
• 0.4532 for terraced houses

It also transpired that in 2016 a first-time buyer with a total income of €25,800 would qualify for a mortgage of a maisonette at around 99% of the value of the median of such property. Consequently, penthouses or terraced houses would most likely fall outside their range.

Other findings are:

• There is an upward trend in property prices and between 2013 and 2016 property prices have risen by around 17 per cent while average property prices have risen by around 24 per cent.

• Property tends to be more expensive in the northern harbour region (Sliema and St Julian’s), which cost twice as much as in the south.

• Figures for the rental market indicate that the average monthly rates for apartments and penthouses are highest in the Grand Harbour hover around €1,100 and €1,600 respectively. This is closely followed by the northern harbour region with average monthly rental rates for apartments of around €1,070 and €1,250 for penthouses.

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