Housing market deserves monitoring – EC Malta Country Report

The European Commission’s (EC) Malta Country Report 2019 said that Malta’s housing market “remains buoyant and deserves continuous monitoring”. It added that the housing market dynamism, reflected in increasing construction activity, rising house prices, and lending, is likely to continue in the near future. However, it also observed that the flourishing Maltese economy needs to be sustainable.

However, concerns about the social impact of this ‘dynamic and buoyant’ market have resulted in persistent calls for government intervention in what was perceived to be a ‘wild-west situation’ as it was described by operators in real-estate who spoke to Newsbook.com.mt. From an economic standpoint, monetarist economists firmly believe that government intervention in the economy will only bring about an imbalance in the market.

In October 2018, Government launched a white paper to regulate the rental market. It proposes longer-term contracts, compulsory registration of rental contracts and a period of notice when the owner wants to terminate a lease, with the Housing Authority tasked with overseeing the rental market and enforcing rental regulation. The 2019 budget also proposed measures to support private rental housing.

New year, new rent laws but EU wary

Recently, the Prime Minister announced that a new rent reform will be introducing several changes in the Maltese housing and rental industry.

Read: Rent Reforms to be implemented next January

Read: Parliament approves rental market reform proposals on 2nd reading

However, the European Commission is also understood to be keeping tabs on this action, as in its report it stated that “it remains to be seen whether these measures will be sufficient to address Malta’s rental market challenges.”

Is Malta facing a housing bubble?

Housing prices in Malta registered a sharp rise between 2013-2015. Prices have since levelled off and even indicated a mild downward trend leading some to question  the hypothetical bubble will soon pop.

Read: Apartment prices increase for 6th year running – NSO

During the last decades, many countries experienced massive boom‐bust cycles in house prices, the European Central Bank (ECB) stated in a working paper report. It explained that a housing or property bubble is a type of economic bubble that occurs periodically in certain real estate markets and typically follows an economic boom.

However, a rational bubble is only sustained by the expectation that land prices continue to be high in the future, the ECB explained. When these expectations change, the bubble bursts and land prices collapse. This is understood to wipe out the collateral of housing entrepreneurs and lowers their credit demand. It also reduces loan repayments received by bankers, thereby reducing their net worth and contracting their credit supply.

Credit: Eurostat

As can be seen in the graph above, both Malta’s and the EU’s house prices plummeted during 2007’s financial crisis, and have then increased consistently until 2015 in the case of Malta. However, even with a blossoming economic situation, house prices in Malta are still a far cry from the 2008 peak which they had attained when riding on the wave of the introduction of the Euro.

The full European Commission report can be found here.