Dwell(ing) on the property boom

Jordan Portelli analyses the realities of the current property boom and its sustainability.

Over the past few years Malta has experienced a boom in the property market, mainly triggered by economic expansion. In fact, data published for 2018 by Eurostat, the European Commission’s statistical office responsible to provide statistical information to institutions of the European Union showed that Malta’s real gross domestic product (GDP) growth was among the top five within the euro area at 6.7%. Among the contributors to this important figure is the property market. In reality, it would be interesting to identify the factors that triggered the current economic boom. As with many other economic factors, property pricing is a demand and supply force.

The demand aspect

Looking at the demand aspect, one would certainly look at the current domestic situation, but also what the future expectations are in terms of demand. Factually, Malta has experienced a remarkable expansion in the financial services and gaming industry, which for 2018, accounted to circa 18% of total GDP. Both industries had their fair share in terms of the value-added preposition and undoubtedly the property market wasn’t the exception. In practical terms, both industries employ a considerable number of foreign workers with the latter tapping into the rental property market, thus increasing the demand which, in turn, pushed up the prices of rent.

However, a very important economic factor, the domestic unemployment rate, has also had a remarkable impact on the property market. Latest data released by Eurostat shows that the unemployment rate in April was the fifth lowest among the 28 member states at 3.5%. Looking at the economic perspective, with such a low unemployment rate, which economists would define as the natural rate of unemployment, i.e. a level which is close to full employment, it would be difficult to hold to the said growth levels. But despite the many who might argue that the surge of foreign workers will pressure wage growth to the downside, it is an economic fact that such workers are needed if we want to sustain high levels of economic growth.

Furthermore, from the demand aspect, probably at the expense of other Mediterranean countries, Malta has experienced an exponential growth in the tourism sector over the years. This phenomenon was particularly triggered by the introduction of low-cost carriers in 2006, when the government at the time had introduced a route support scheme and subsidised these low-cost airlines that opened new routes.

Undoubtedly, the main aim was to boost tourism. Such decision was crucial to see the ever-increasing passengers passing through Malta International Airport (MIA). Recent data released by MIA as at 2018 showed that passenger movements reached 6.8 million from the 6 million in 2017, a 13.2% increase, while since 2016 it registered a 33% increase. This increase in tourism inbounds has led to a surge in direct rentals, in addition to other online hospitality services, namely Airbnb which over the past years has increased its popularity domestically. This surely is another factor which continued to pressure property prices upward.

Lastly from the demand side, another very important factor which had a huge impact on the property market is the low interest rate saga. Following a recession way back in 2009, leading central banks, as expected, took on a very important role to instigate economic growth. Indeed, one of the monetary tools put in force by central banks was to lower interest rates. In fact, interest rates have been on a downward trajectory since 2009, from just over 4% to today’s 0% level in line with a stagnation of economic expansion. However, the very low deposit rate returns are more of a concern for investors.

Put simply, as opposed to the golden years where investors could generate attractive returns by placing their savings into fixed deposits, today an investor is faced with very low returns. Thus given the capital surplus, also due to the said unattractive returns, investors have shifted to higher yielding venues such as the domestic property market, which in turn inched property prices higher. A very simple and practical example: if an investor today invests in a local government bond with a maturity of 10 years, he would generate a return of circa 0.82%, if held till maturity. On the contrary, if the same investor has invested in a property for rental purposes, taking a conservative approach, he would lock a yearly return after tax of an average of 4.5%.

THERE IS A STRATA WITHIN THE COMMUNITY WHICH IS EXPERIENCING SOCIAL IMBALANCES… THE HOUSING AFFORDABILITY ASPECT MAINLY FOR THE MIDDLE TO LOWER CLASS HAS BECOME AN ISSUE OF CONCERN

The supply aspect

It is a fact that countries pass through economic cycles and Malta is no exception. It is important that the current property boom is monitored very closely though. The current demand might not be sustained in the future. Over the past years we’ve been seeing an ever-increasing supply, while demand might have slowed in its pace. When looking at the annual statistics for 2018, published by the Planning Authority, whereby it approved 12,885 dwellings, higher than the 2007 record, one might argue whether supply will surpass demand in the future. This could trigger very serious consequences, not only to the property market, but also to the entire economy.

The affordability dilemma

Contrary to those who have the opportunity to leverage themselves and seek the current golden opportunity there is a strata within the community which is experiencing social imbalances. Indeed, the housing affordability aspect mainly for the middle to lower class has become an issue of concern.

Primarily, the increase in rental prices is compromising the standard of living of those being faced with rental increases. Secondly, first-time buyers are struggling to find bank support in order to fulfil their desire of having their own property, given the exuberating higher property prices with respect to their gross income. In fact, many have been vocal on this social imbalance, which pushed the government to act to possibly mitigate such a reality, by subsidising rental prices to those in need, while helping first-time buyers by offering duty reliefs.

Ultimately, despite the fact that the increasing trend of construction seems to have more legs to run, one might be very mindful when looking at the possible implications. The basic economic theory of demand/supply imbalances can change instantly, given that the Maltese economy has over the years been built on sectors that are very sensitive to regulation.

Predominately, the attractive tax regime offered by Malta as a jurisdiction was an important factor in attracting foreign direct investment, which was also important for the local property market uptick. Thus the recent waves of pressures by the European Commission to have a common tax regime is one to be monitored as this can have serious implications for Malta’s economy and thus also for the property market.

From an economic perspective, a word of caution is warranted. Over the years Malta has shifted from being a manufacturing country to a more services-oriented country and thus it is imperative that the government continues to preserve through its forces the sustainability of our offerings, in addition to work on more expansion, in order to sustain economic growth. This in turn would probably sustain the property market, given a demand/supply balance.

Words by

Jordan is an economist and a portfolio manager for a local asset management company.