In 2016 real house prices grew by 4.7% over 2015 and reached the pre-crisis peak, the Financial Stability Report by the Central Bank of Malta has revealed.

"Apart from rising incomes, such upward pressure on house prices largely reflected the increase in population from inward migration to take up employment opportunities in Malta."

A study published by the CBM also suggested that property prices in Malta have been undervalued, but noted that further price increases without a corresponding increase in household income could swing the housing market into overvaluation territory.

"Nonetheless, there seems to be no significant upward pressure on affordability as the median house price-to income ratio remained significantly low when compared to the boom period of 2005/2006," the report reads.

In response to the higher demand, the supply of property was anticipated to expand in the near future, as evidenced by the increase in the number of permits issued by the Planning Authority which almost doubled in 2016, though still somewhat lower than the pre-crisis peak

"Initiatives such as the relaxation of height restrictions in highly urbanised areas, will also aid in expanding housing supply."

However, CBM's Real Estate Market Survey (REMS) indicated that a significant number of real estate agents believed that "residential properties were overpriced in 2016."

"Nevertheless, survey results indicated that sales volume of existing and new residential properties rose."

With regards to commercial property, the estate agents found that the market to be correctly-priced, and reported higher sales.

The report also found that the "real GDP growth is forecasted to slow down somewhat, but to remain robust at 3.7% in 2017 and 2018, closing the positive output gap."

"This is supported by strong labour market fundamentals, as the unemployment rate is projected to remain at a historically low level."

It was noted that inflation is predicted to pick up to 1.6% in 2017 on the back of higher oil prices and a rise in services inflation, while fiscal consolidation is expected to bring down further public debt.

The report said that the potential negative effects from Brexit on the United Kingdom are likely to have a relatively small impact on Europe and Malta.

In general, the analysis confirmed that the domestic financial system remained robust and resilient to a number of key challenges, buttressed by favourable domestic macroeconomic conditions.

"Sluggish credit growth coupled with a persistent low interest rate environment, remain a key challenge for banks."

The Financial Stability Report can be downloaded from www.centralbankmalta.org or obtained in printed form from the Central Bank of Malta.