The power of property price indices

Last Updated on Thursday, 12 August, 2021 at 1:22 pm by Andre Camilleri

Derrick Maguire, Founder and CEO of TIPFG

The world over we seem fixated with indices of various kinds – be it property, currencies, inflation, voting intents, etc. In the following text, discussion will be made concerning the PPI (Property Price Index), how it infrastructurally and effectively present in the context of Malta and lastly how the PPI could and should be improved.

The PPI is a macro-economic tool used as a guide for investors and home buyers. The former work purely on the numbers and if it gives them a guide to the yield or the capital appreciation history of an area. The latter simply tells them a guide price to pay for their home and if it is in a good location, should they want to upgrade in later years.

So how good is PPI for these persons mentioned? PPI certainly gives a broad guide to an area/city and if it is kept up to date with live data then the steer it gives is a solid one indeed. The more variables the PPI contains the better the judgment for the person concerned – like number of bedrooms, detached/semi-detached, parking, schools nearby, transport links, etc. It is important to factor all of these in when making a decision to invest/buy in the general area.

However, many PPIs are based on historical data and does not show that an area maybe undergoing a complete change – maybe a new road is planned through the centre of area, thus increasing traffic noise and pollution. A school may have shut since the PPI was done, thus devaluing many of the properties for Buyers, though not necessarily Investors.

In the Maltese context, there are a total of 2 existing indices as well as 1 other one that at the stage of conceptualization.

The first of the 2 existing indices is that organized by the Central Bank of Malta. This index is useful for painting a non-specialized portrait of the Maltese property prices, however given the fact that it is only analytical of residential properties and furthermore that it only looks at the asking prices of properties as opposed to the actual sale values, it carries a heavy degree of flaw and thus cannot be handled as a genuine source to get a true reflection of the Maltese market. This is not to say that it does not have its value however, given that an index based on asking prices reflects the trust and growth of the property market. The second index is that organized by the National Statistics Office (NSO), and while it too admittedly is flawed in that it only considers residential properties, it is an overall more grounded in reality, given that it is based off of actual sale prices as opposed to asking prices.

These 2 indices suffer from an overall larger issue however, that being Malta’s size. This translates to difficulty in a PPI having a regional price indicator, given that more data equates to a more realistic median. The potential remedy for this would be to incentivize property owners to disclose the prices they purchased properties for. Just as an example, an attractive incentive could be in the form of agency fee discounts for property owners who at any point in time choose to sell their property, as long as they can prove that they shared their information with the statistics office.

The 3rd index that is still in the pipeline is that which was announced by the Central Bank of Malta and that is the 2020 Malta Residential Study. This study could be the benchmark for residential price inflation in Malta and could better help investors mediate with clients.

Conclusively, Malta lacks in 3 forms of PPI that could be of benefit to investors/buyers – an index for commercial property sale prices, another one for commercial rental prices and lastly, and perhaps the one that should have most priority, a construction cost index. The latter could be a crucial tool for investors and local developers alike as it can lay out realistic requirements for projects and thus circumvent bankruptcy halfway through construction as well as alleviate financial surprises throughout the duration of a project.

What does this tell us about the reliability and utility of PPI?

Even though the PPI may be inherently flawed for the aforementioned reasons, this is not equivalent to calling the tool hopeless. If anything, it is an issue that is a call to action for the betterment of the PPI.

The PPI is something that provides an invaluable service to an investor, it safeguards/legitimizes the investment itself by providing a certain level of guarantee that the investment is actually worth the market value, as opposed to being influenced by a hypothetically greedy or ill-intending party in the deal.

Furthermore, the PPI has a factor of longevity in its utility. Once an investor enacts a purchase of immovable property, they can rely back on the PPI for the median rental price of the type of property they have in any given area. This allows the investor to ensure that there is a stable form of revenue coming from a rental investment and also allows the investor to understand more or less what the market value is, thus giving him a basis for his negotiations with a potential tenant.

None of this can be reality if the PPI is not well maintained and promoted. The simple fact is that a well-functioning PPI has many bonuses to all buyers, not to mention investors. Inherently, a functioning PPI attracts further investment, because it guarantees stability by giving objective market analysis and bolstering investor trust. Why not develop something that we already have the basis of, when the prospects are nothing but success for all those involved?

- Advertisement -