Risk of property bubble bursting is there and should be keenly monitored, economists say

Last Updated on Thursday, 16 February, 2023 at 7:15 pm by Andre Camilleri

While developers and estate agents insist that there is no risk of the property bubble bursting, economists have expressed a different view, saying that the situation should be keenly monitored because the chance of this happening is well and truly there.

The Malta Developers Association (MDA) and the Estate Agents Section were quick to play down the fact that promises of sale agreements in 2022 were 3,500 short of the number in 2021, saying this mostly happened because a government scheme had ended in December 2021.

Michael Stivala, head of the MDA, said that there’s no worry concerning a property bubble developing and bursting. And this was a sentiment echoed by a variety of real estate developers, among them directors at Alliance, Belair Property, Excel Homes and Ben Estates.

When contacted for their take on the subject, Daniel Gravino, Marie Briguglio and Charmaine Portelli, all economists within the University of Malta’s Faculty for Economics, Management and Accountancy, offered different views on the subject.

Daniel Gravino

Gravino states that property prices have been increasing these past years, averaging 10% per annum between 2016 and 2019. As a consequence, many people, especially first-time buyers, are being priced out of the market. Whereas in 2013 an average-sized apartment would sell for nine times the average annual salary, today that figure stands at 12 times the average salary.

Orthodox thinking states that this increase cannot continue indefinitely meaning that prices may well decrease at some point, said Gravino. We need to ascertain and monitor the causes for the initial increase in prices to determine whether a bubble can, in fact, burst.

There were several factors that led to increasing prices: a big influx of foreign workers in the financial and gaming sectors, foreign workers in all sectors willing to flat-share, a low interest rate environment and a housing supply that was playing catch-up with the massive demand to house all these immigrants.

Gravino went on to say that trying to calibrate what might happen in the future requires carefully assessing what will happen to these factors.

Will the number of foreign nationals in Malta continue to increase? Based on the positive projections for the Maltese economy, there is no reason to believe that the number of foreign nationals won’t continue to increase. These will help sustain demand for housing.

Will the supply of new housing units slow down? Current data shows that the number of new housing units that were approved by the Planning Authority in 2020 and 2021 were significantly lower than the number for 2018 and 2019; but the supply picked up again in 2022.

Will the interest rate increase? An increase would mean people are less able to get money to spend on property, putting downward pressure on house prices. Although leading local banks have publicly claimed that they do not intend to increase interest rates in the foreseeable future, higher interest rates could arise if the international inflationary environment persists in the future.

Gravino ended by saying while it’s impossible to predict what will happen in the future, we need to continuously monitor these factors simultaneously to figure out what will happen.

We need to ensure that reliable and timely information about what is happening in the housing market is readily available so that potential sellers, buyers and investors can make informed decisions.

“What will happen also depends on our decisions.”

Marie Briguglio

Briguglio was largely in agreement with Gravino that the Maltese housing market is definitely not immune to property bubbles; if a bubble were to form, it would cause hardship among those who have borrowed money to buy property at high prices, only to have to sell quickly and at a loss. The effects could then be felt widely, across various markets, as the government may find itself having to use tax revenues to mitigate the damage.

A bubble bursts when the economic conditions that caused demand and prices to rise are no longer present, and there are two main risks that Briguglio identifies.

Firstly, the very low interest rates will likely increase, which would make it harder to borrow money, causing a downturn in the demand.

Secondly, “demand by foreign buyers (stimulated by citizenship incentives) and renters will eventually plateau, and if supply continues to flow out at current rates, then prices will experience a downward pressure”. 

The key to understanding whether there is a bubble or sustainably high prices is to ask questions about the “fundamentals”, that is whether house prices are misaligned with the rest of the economy.

Are prices rising as a result of inflation over the whole economy or merely the property sector? If the former, then it’s unlikely to be a bubble; Briguglio says it’s the former.

Are prices rising on par with earnings or vastly outrunning them? If the former, then it’s unlikely to be a bubble; Briguglio says it’s the latter.

Are prices rising because of real increases in the cost of supply or are they being artificially inflated? If the former, then it’s unlikely to be a bubble; Briguglio says it’s the former.

“All things considered,” said Briguglio, “there is little to indicate that there is a bubble right now but there is a risk stemming from interest rate increases and the decline in foreigners coming to Malta. Then again, judging by the history of governments stimulating housing demand, it is unlikely that the bubble, if such were to emerge, would be allowed to burst.”

Charmaine Portelli

Portelli’s answer seems to be one of caution.

She said that with prices soaring, the question as to whether there’s a price bubble forming is a difficult one to diagnose correctly.

On the one hand, Portelli said, “supply and demand imbalances, rising labour and construction costs and the availability of low-interest loans are all factors that can cause house prices to increase without indicating that a bubble is present”.

However, if prices rise to an “exuberant” amount, “they may increasingly be untethered to the economic fundamentals which underpin the market”, indicating that a bubble is likely to form and burst.

Accordingly, “the extent to which house prices drift apart from incomes and rents is crucial especially in a low interest rate environment”, Portelli said.

When speaking about the conditions and factors to look out for in trying to diagnose whether there will be a bubble forming, Portelli said that we need to look at increases in interest rates that increase the cost of borrowing thus lowering demand, a decrease in the influx of foreign workers and increases in the stock of rental units that suppress prices.

During a low interest rate environment, real estate was considered to be the most attractive investment, but with the increase in interest rates, financial assets may offer a more attractive investment opportunity, which will further lower the demand for real estate as people anticipate lower prices given all these considerations.

Taken altogether, Portelli said that it’s difficult to predict when housing prices will stop increasing, thereby causing a bubble to burst. But “the risk of all this materialising is there and should be keenly monitored”.

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