Mortgages

Malta’s housing scene – The Malta Independent




Eurozone economic growth fell to 0.2% in the third quarter, as inflation hit another record high on the back of soaring energy prices, the EU’s statistics agency said on Monday.

The war in Ukraine has made the propensity for inflation rise faster. On the other hand, it has sparked sharp increases in energy prices and other commodities, pushing inflation above 8% in America and 9.2% in Europe. Malta is feeling snug at an inflation of 6.8% yet this rate is not the real one as the government is directly capping price increases of imported energy and cereals (at €1.6m daily).  

At present there are circa 8,500 unemployed as revealed in the latest Labour Force survey or 3.7%. At the same time, business and consumer confidence is slowly crumbling in economies which buy our exports. Malta was not immune to such inflationary pressures and saw consumer prices jump from an average annual rate of 0.7% last year to an annual rate of 6.8% in July 2022.

Can we associate such economic factors as a harbinger of a property bubble that may eventually collapse? Check with the National Statistics Office and then solemnly declare that a total 1,003 final deeds of sale and 1,002 promise of sale agreements relating to residential property were registered with the tax authorities in December.

This means a drop of 28% in annual rate of change. The NSO said that in December, the value of the final deeds totalled €225.1m, 28.5% lower than in December 2021. A total of 916 of the total final deeds of sale involved individual buyers, with companies accounting for virtually all the rest. The value of the deeds involving individual buyers amounted to €186.3m, equivalent to 82.8% of the total value. In the fourth quarter of 2022, 3,738 final deeds of sale were registered, an annual decrease of 4.1%.

The value of the deeds registered during this period went up by 0.1% over the same quarter of the previous year and amounted to €859.3m. A recent KPMG study shows how a total of 11,086 promise-of-sale agreements involving individual potential buyers were registered last year, down by 22% when compared to 2021. KPMG said the drop was persistent across most months and spanned property deals involving both households and firms as potential buyers.

Last year, the number of final deeds involving households as buyers fell by 1.6% but the value of the properties sold increased by 4.5%. Simply put, property bubbles are caused by a variety of factors including rising economic prosperity, low-interest rates, banks offering competitive mortgage offerings and easy access to credit.

Forces that make a housing bubble to burst include a downturn in the economy, a rise in interest rates, higher unemployment and a drop in demand. Why is housing such an important factor when governments can easily monitor the supply of affordable listings to reduce poverty and increase economic mobility.

The 2023 Budget grants €1,000 annually for 10 years to first-time buyers to shoulder increases in bank interest rates and a bevy of charges. Research shows that increasing access to affordable housing is the most cost-effective strategy of reducing poverty and increasing economic mobility. In Malta, more sour news seeps in the media which inter alia show that 16% of the entire population is caught in a poverty trap.

So are these the factors that can cause a housing crash. The prime mover is a sharp decline in real estate values that typically follows a prolonged period of artificial high house listings. Housing crashes are generally caused by a slowing economy.

Inflation will go on increasing following ECB’s policy to control inflation by rising interest rates, causing a hike in mortgage lending rates – all of which can contribute to a decline in demand. Housing bubbles burst because the economic conditions that inflated the bubble are no longer in place.

For example, when interest rates rise (as most predict this is a certain predicament), the cost of home ownership rises as well, placing a downward pressure on market prices. Such a measure would further increase the developers’ costs and decrease buyer affordability, by increasing the monthly loan repayments, and in turn decreasing the amount buyers could borrow.

In Britain, 2 million households could see their mortgage absorb another 10% of their income, according to official estimates. Those who cannot afford the payments may have to reluctantly place their house on the market (this in itself creates a downward pressure on listed prices). For instance, studies show how in Britain mortgages make up almost 7% of lenders’ loan books, compared with 12% before the financial crisis. In Asia, we observe how things started to go wrong last year in China with the default of Evergrande, a giant realtor and developer.

In parts of the country, distress is turning into defiance with mortgage-holders banding  together and threatening to stop repaying their loans if work does not resume on long-overdue homes. Locally, one appreciates another KPMG scientific report based on a national conference they hosted on 4 October 2019. This conference occurred before the onset of the pandemic in March 2020, yet speakers warned that Malta is quickly building a reputation as a destination for working-class migrants and low-cost tourists as a result of local tendencies to accept compromised quality as a means of cutting costs. Some mentioned excess bureaucracy and acute challenges experienced by non-EU residents when opening bank facilities.

In conclusion, the Malta Developers Association, the Chamber of Commerce and others have cautioned the authorities that a bubble may burst due to runaway inflation in building costs, future increases in mortgage rates, lack of enforcement of building standards by the Planning Authority and other regulators coupled with a risk of a mild recession in Europe.

The European Central Bank announced another jumbo interest rate hike to try to curb inflation driven up by the fallout from Russia’s war on Ukraine. “It is a matter of how deep the recession will be and not if there will be one,” Oxford Economics said in an analyst note. The ECB is fighting a battle on two fronts – record-high inflation and a slowing economy. Meanwhile, survey results recently showed that the eurozone is slowly entering into a mild recession with business activity slipping at the fastest rate in almost two years, as the cost-of-living crisis dampens consumer demand.

Thank heavens that the word “recession” did not feature in our New Year speech by Robert Abela when he forecasted serenity and steady progress.

 

 

George M. Mangion is a Senior Partner at PKF Malta

gmm@pkfmalta.com





Source link

Leave a Response