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17/05/07 - Malta
Property Market Continues to Fluctuate |
The Malta Independent
claims this is driven by the fact that house prices have risen by an
average seven per cent per annum over two decades.
Malta being a small island with a very limited supply of land for building,
property values can only go up. Densely populated Hong Kong is the obvious
disproving example, as its property market crashed in the early 1990s.
Germany is now out of its economic doldrums that saw house prices stay flat
or falling for most of the past decade. The US housing market slowdown
started last year and Florida prices have crashed. Property values on the
Spanish Costas are collapsing after a long boom, with the construction
industry continuing to churn out homes. Sounds familiar?
Meanwhile Malta’s property values have serenely spiralled up since the early
1980s
There are some who may think that higher house prices make a country richer.
Not so. When house prices inflate, owners are made better off by as much as
those who would buy from them are made worse off. That does no more than
redistribute income among residents, mostly from the young to the old.
How is it then, that property prices in Malta have continued to ramp up even
with a quarter of residential stock empty? What are the extraordinary
factors holding up Malta’s property values when there is gross oversupply?
How did Malta’s oversupply happen? The answer to that last question is the
first layer of the analyst’s onion.
Oversupply triggered by ‘repatriated wall of money’
Market activity is driven at the margin by those needing to sell to those
wishing to buy with available funds. The oversupply surge was triggered by
that repatriated wall of money around 2001 looking for something to do,
which found its way into tangibly understood “safe” property. The “me too”
virus infected people from all walks of life.
Some could only afford to put up a shell – a permitted eyesore – over their
freehold, thinking that they must not miss out. All investors, together with
the construction industry, form a large constituency with a vested interest
in perpetuating the property market’s momentum.
The charge of the real estate investor bulls has happened elsewhere globally
at various times. However, Malta’s bovine seems to be a different species.
Many private equity investors are not beholden to the banks, i.e. not making
repayments and thus immune to the bank rate ratchet.
Neither do they seem bothered about the opportunity cost of holding vacant
property. They can afford to sit tight on their perceived store of value and
wait, and wait, until they – or their inheritors – get their price.
Meanwhile, those shells despoil the island awaiting a first buyer –
injecting some cash flow – to move into a building unfinished on every other
floor.
Many residents in Malta have building sites foisted around them but the
hardest sell is persuading a buyer to move into one.
Law of unintended consequences
The investor suppliers in Malta contrast with the UK, where the bulk of
house sales are by owner-occupiers motivated to sell. New builds are brought
to the market mainly by listed companies that must turnover their output,
otherwise – lower sales, lower revenue, lower profits, lower dividends, the
share price is punished and maybe the CEO is fired.
Therefore, in comparison, there is a very much less active market in Malta
where investor suppliers are not highly motivated sellers and not pricing at
the market clearing rate, and less of a supply where shells are not ready
for immediate occupation.
The oversupply has been very good for the construction industry. It is,
however, truly a case of The Law of Unintended Consequences, with
construction importing materials, and giving Malta a building site image
that undermines the tourist industry that contributes to the balance of
payments.
A house is only worth as much as a buyer is prepared to pay. Except – it
seems – in Malta.
Incredulous foreigners and even residents have found to their cost that a
buyer may drive a price down but it can be irrelevant when it comes to
paying stamp duty. The government architect sets a market value for the tax
and only he knows how that figure is reached. No doubt it includes an annual
inflation factor – perhaps that historic seven per cent.
This effectively is an official endorsement of increasing property values
that suits that constituency of vested interests – not least those with
property holdings “marking to market” on balance sheets. Incidentally, that
seven per cent has provenance in the Central Bank of Malta 1980-2004 house
prices index that was based on advertised prices, which begs a reality check
question.
Two property markets in Malta
Property sales to non-residents – excluding Designated Special Area
developments – peaked at 890 in 1989 and amounted to 379 last year. While
residents might anecdotally hear of local buyers being outbid by foreigners,
their recent numbers hardly contribute to overall demand inflation.
So there it is. Two property markets in Malta: one happening in the real
world of negotiated purchases that is determined by many – sometimes unique
– factors for every house, and the other in the parallel universe of a
government official deciding market values and a property index based on
advertised prices.
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