In 1981, ‘Perry’ Spiteri-Paris moved into Sliema, converted a former garage on Tower Road into an office and started his eponymous real estate business. It was in a rather unassuming neighbourhood at the time and an odd place to put up shop. No parking, no shops, no offices around.

Now, almost 40 years later, he is neighboured by 10 other property brokers, including Sotheby’s. He has done astonishingly well over the years. And so has Malta: it is not an exaggeration to claim that our island has, for good or bad, grown into a real estate behemoth, super-charging our economy.

We who live on this island have profited greatly from this development, no matter how much we lament the dust, noise, traffic congestion and loss of rural land. According to the National Statistics Office, 76.5 per cent of Maltese households are home owners and the majority of us own their home even outright, without a mortgage. Most young people acquire houses or flats when they marry, and 98 per cent of families with children have their own home.

And, of course, we all have a telly and drive our own car. In this respect we are an unusual country, a country the English wished to be.

Is this situation sustainable? And what does it mean for us retail investors? Should we buy into this craze, or fear a crash as devastating as experienced by Japan in 1990 or by the US and many European countries in the aftermath of the subprime crisis of 2008? Is real estate a volatile and risky investment, or a safe haven? These are questions which matter for all of us – for households, investors and government.

At first sight, falling prices seem to be a blessing for many. More people can afford nicer homes – first-time buyers, young people and all people struggling to put up the necessary cash. Investors, and those who are home owners, will get wealthier faster when prices are rising, increasing socially damaging inequality (and envy).

Yet in Malta, with its soaring tourism and property industry, too many of us depend on real estate booming. Our often despised resident permit schemes, our passport-for-money ruses and our ‘special designated areas’, where foreigners can buy property without limit from afar, is feeding all of us, from developers to janitors, from builders to the Inland Revenue. Note: Social subsidies need large funds to be effective. Malta does a good job alleviating income disparity, with inequality below the EU27 average.

There is an argument that it is our poor locals who bear the communal costs for the ‘super-rich migrant’, the ‘self-styled expat’ and the ‘world citizens who buy our passports’. The argument sounds juicy but is far from the truth. We all profit handsomely, even while wasting money on universities which never really open and hospitals which are a blunder. Fears that absentee investors will transform our island into eerily empty ghost towns of high-rises are so far unfounded. Too lucrative is the rental income for those maligned foreign landlords to be dismissed. An estimated 50 per cent of their tenants are Maltese, easily refuting shrill claims of an alarming reversal of de-colonialisation. Apropos high-rises: do we prefer to expand our economy horizontally, or rather vertically?

The good news for us retail  and real estate investors are summarised in a study published by the Federal Reserve Bank of San Francisco in February this year: ‘The Rate of Return of Everything’. Examining the development of asset prices in 16 advanced economies since 1870, the paper’s authors found that putting together net rents and appreciation, real estate investment had yielded seven per cent per annum on average – through wars, hyper-inflation and market collapses, with less price fluctuation than stocks and bonds. Far from being risky, property seems to be vastly profitable too.

An all-permeating perception of only ever rising real estate prices can feed bubbles

Yet nothing is rosy for ever. What goes up, must come down, as the well-worn investor’s adage goes. And the average has limited consolation for the individual suffering. “In the long run we are all dead,” as the economist Keynes had remarked drily. Japan never fully recovered from its real estate crash in 1990, and Greeks will have to wait for generations to see their land rise in value to pre-crash levels.

In the meantime Malta seems to be in a sweet spot. Rental yields hover between four  per cent  and six per cent, real estate prices appreciate between five per cent and 10 per cent per annum, easily compensating for the 10 per cent  expenses in stamp duties, realtor commissions and legal fees. It can safely be said that we experience a yield of 10 per cent per annum, rather than the officially acknowledged five per cent — with no pockets of stagnancy. Even the cheapest corners of our island prosper. Any prophecy of doom seems wide off the mark.

Yet possible and certain dangers hover on the horizon for our profane, rags-to-riches property bonanza, though most of them are not acutely critical yet.

First, interest rates are on the rise again. When interest rates rise, other, more lucrative, opportunities for investors may open up, cooling their interest in property. Rising mortgage costs will diminish the pool of potential buyers too. This is a risk not to be easily dismissed. We should guard ourselves.

Secondly, an all-permeating perception of only ever rising real estate prices can feed bubbles: investors are ready to take on dangerously high debt, and banks are willing to lower credit standards mollified by the rising levels of their collateral. While we may already believe that real estate is a one-way bet, banks have learned to be more restrictive after the last recession. No risks here yet.

Thirdly, worldwide economic growth is still on the rise. No risk of a slump in sight.

Furthermore, the EU might come down on intra-European, national tax competition, damaging Malta’s low-tax-induced, nationwide, real estate business. A risk which we may inflict on ourselves before its time, through egregious misbehaviour and truculence.

Also, there may be dangerous, bubble-inducing justifications for excessive supply fostered by the argument that “land is restricted”.

It never is a danger, but we are not quite there. Monaco, the country of choice for the ultra-rich, has recently decided to extend its territory by a few square miles into the sea, while we lament White Rocks.

And lastly, the political direction could change. For the time being both parties, PN and PL, are firm believers in Malta’s real estate growth model, almost fanatically. It is not very likely that they will change tack any time soon, at least not under their current leadership. Yet the lure of economically illiterate populism or even well-meaning moralism can come damagingly quick to the rise. Think of Trump, think of Brexit, think of Corbyn.

While the good times last, we should refrain from bashing foreigners bringing gifts and delve into real estate with gusto. So long as we stay prepared for the downturn. 

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, poli­tics and finance. The purpose of his column is to broaden readers’ general financial know­ledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

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