Property undervaluation fading as prices move closer to fair value – Central Bank Governor

The Governor of the Central Bank of Malta, Alexander Demarco, has said that while property prices in Malta have risen substantially over the past decade, Central Bank indicators suggest that the market has not been in a state of persistent overvaluation in recent years. Instead, the bank’s estimates show that property prices were somewhat undervalued over much of the past five years, with this undervaluation gradually diminishing as prices move closer to what the bank considers fair value.

Speaking to this media house, Demarco said the Central Bank regularly publishes an index designed to assess whether property prices are overvalued or undervalued relative to economic fundamentals. According to this indicator, prices are now “tending more to being correctly valued”.

He noted that property prices have increased by around 75% over the past decade, equivalent to approximately 5.5% to 6% per year. However, he cautioned that focusing solely on price growth gives only a partial picture. Affordability, he said, depends on the relationship between property prices and household income, rather than on prices in isolation.

Demarco acknowledged that many people on lower incomes struggle to purchase property, but argued that homeownership has never been easy. Buying a home, he said, has always required personal sacrifice. He rejected the notion that previous generations had it significantly easier, pointing out that wages in the 1980s and 1990s were much lower and that items such as electronics, cars, and overseas travel were relatively more expensive than they are today.

According to the governor, income levels in Malta have continued to improve, and the ratio between property prices and income has been on a downward trend since 2009. After 2016, he said, Malta’s affordability levels were even better than the EU average, based on Eurostat data. By 2024, Malta’s price-to-income ratio had returned to roughly the same level recorded in 2005, despite the substantial increase in nominal prices.

“As this ratio comes down, affordability improves,” Demarco said.

He attributed this improvement to several factors. Female participation in the labour market has risen sharply, increasing household incomes. Maltese-born workers have increasingly shifted from lower-paying jobs into higher-skilled and better-paid roles. At the same time, Malta’s tight labour market has placed upward pressure on wages.

Demarco also argued that if property prices were genuinely unaffordable on a wide scale, Malta would have seen a decline in homeownership rates. This has not happened. Malta, he said, continues to exhibit very strong homeownership levels, reflecting both affordability and a deeply ingrained culture of owning rather than renting.

Homeownership remains strong

Demarco, who took up the post of Central Bank Governor at the start of this year, said that discussions about housing prices must always be linked to affordability. Even though prices are rising, the data does not suggest a collapse in access to homeownership.

Last December, before his appointment, he had told The Malta Business Weekly that Central Bank estimates showed property prices to be undervalued by around 5% over the preceding three and a half years. He also recalled that Central Bank reports identified property overvaluation prior to the 2008 financial crisis, followed by a period of undervaluation.

“We try to estimate whether there is an overvaluation or undervaluation of property prices,” he said.

Prime Minister Robert Abela recently stated that nine in every 10 youths under the age of 35 own their home, citing data from the Central Bank’s Household Finance and Consumption Survey. According to this survey, homeownership among Maltese households in the 16-34 age cohort rose from almost 81% in 2014 to 91% in 2023, while ownership among those in the bottom income quintile increased from about 58% to almost 61%. It was later clarified that these figures refer to households, not individuals.

Demarco has now also cited data relating specifically to individuals. An Esprimi survey conducted in November found that among adults aged 16 and over, 51.6% fully owned their home, while a further 24.6% reported shared ownership. Another 12.6% said they intend to buy property in the future. In total, nearly 89% of respondents either owned, co-owned, or intended to purchase a home. Only 11.2% said they neither owned property nor planned to buy.

Among adults aged 25-34, 76.3% either fully owned or co-owned their home. Of this group, 42.3% were full owners and 34% partial owners. A further 11.3% said they do not yet own property but intend to buy, while 12.4% said they neither own nor plan to buy.

For those aged 16-24, 18.4% already owned property, either fully or partially, and around 60% said they intend to purchase in the future.

Demarco said this suggests that most young people still see homeownership as feasible. He argued that individuals would not express an intention to buy property if they genuinely believed it was unattainable.

Poverty and inequality

Asked about statistics showing that nearly one in five people in Malta are living in or at risk of poverty and social exclusion, Demarco said such figures are often misunderstood. The indicator measures relative poverty – those earning less than 60% of the median income – rather than absolute deprivation.

“While people have done better over time, some people have done better than others,” he said.

He noted that many individuals classified as at risk of poverty and social exclusion are pensioners, who have fallen behind wage earners in terms of income growth. By contrast, measures of material deprivation, which capture absolute poverty, have fallen significantly in recent years.

National debt and fiscal policy

Demarco said Malta’s rising national debt should be assessed relative to GDP rather than in nominal euro terms. While national debt stands at around €11.2 billion, Malta’s GDP in 2024 was approximately €22.47 billion, placing the debt-to-GDP ratio at around 47%.

“If GDP is growing faster than debt, then it’s not that worrying,” he said.

He compared this to two individuals with different incomes and debt levels: the one with the higher income may be better placed to service a larger debt. Higher GDP translates into greater potential tax revenue and a greater capacity for government spending.

However, Demarco said that in periods of strong economic growth, countries should ideally be running budget surpluses rather than deficits. Malta has not recorded an annual surplus since 2019, although the deficit has been declining.

To reduce debt in euro terms, fiscal surpluses are required. Nevertheless, Malta’s debt level remains below the 60% threshold set under EU fiscal rules, giving the country fiscal space to respond to economic shocks.

“Shocks will happen,” he said, adding that governments must preserve sufficient buffers to support the economy during downturns without breaching EU rules. He also noted that new EU fiscal rules introduced last year require greater discipline in public expenditure.

Energy subsidies and renewables

Demarco said government energy subsidies, introduced in 2022 in response to surging prices after Russia’s invasion of Ukraine, were timely and helped stabilise confidence among households and businesses. However, he stressed that subsidies should be targeted, temporary, and time-bound.

Energy prices have fallen significantly over the past two years, he noted, and maintaining subsidies indefinitely would place a permanent burden on public finances and the balance of payments.

He argued that Malta should invest more heavily in renewable energy as part of an exit strategy from subsidies. Increasing domestic renewable generation would reduce dependence on imported fossil fuels and exposure to volatile international prices.

Malta aims to increase the share of renewable energy in electricity generation from around 10% to 25% by 2030, mainly through offshore wind. Currently, Malta ranks last in the EU for the share of electricity consumption generated from renewables, at just over 10%.

Demarco cautioned that offshore wind alone is unlikely to be sufficient. He said Malta may need to strengthen interconnections with other countries, potentially including North Africa, although this raises energy security considerations.

He also suggested that certain energy-intensive sectors performing strongly, such as tourism accommodation, could be gradually exposed to higher energy prices rather than fully shielded by subsidies.