Is the cultural fetish for property, based on the assumption that in a small island such as ours property never loses value, correct? A growing number of financial pundits are saying privately it is a fallacy, and that in fact we are heading for a slump in the property market.
The false sense of security they say, is based on the fact that there hasn’t been a slump for almost 30 years, and people’s memories are short. But circumstances in the last few years have changed dramatically, and this is bound to affect the property market. The economy has developed from a sheltered one to an open one. Moreover, membership of the EU has made economic restructuring an urgent priority and job losses are inevitable; the fall in the island’s competitiveness has kept away significant foreign investment. This is quite apart from the sorry state of our public finances
A cursory glance at the last 30 years puts us in the picture. In the late 1960s we experienced the first property boom because of an emerging tourism industry. But in the early 1970s when the British started leaving, the market was flooded with property and we saw the first property bust in modern times, which was one of the factors leading to the National Bank crash.
Property prices started to rise again in the late 1970s with the increase of tourism and the growth in the economy, thanks to local and foreign investment in manufacturing. The last 25 years have seen a steady increase in the value of property with intermittent periods of price stagnation. There hasn’t been a bust for 30 years. That is why people are so keen to buy property.
With the liberalisation of the economy in 1987, the Nationalists began gradually to dismantle trade and exchange controls, the last thrust being in the last three to four years, when it became clear that Malta would join the EU. As soon as the government began to dismantle controls, things began to happen. There was an acceleration in the closure of failing factories and the import of goods and services was liberalised. This could have led to job losses but employment was kept up artificially through massive public expenditure that bloated our public debt and our annual budget deficits. Besides, for a while, a surge in tourism, the take-off of financial services and deficit borrowing for projects such as the airport and the power station continued to prop up the slowing economy.
But when it finally became clear that Malta would probably join the EU, Malta had at last to control its public expenditure. So in the last three years overtime was reduced, taxes were hiked, and voluntary retirement schemes in the public sector were introduced. Investment has dried up because Malta has lost its competitive edge, and tourism has shown signs of a serious structural decline.
How strange then that at the same time that the economy began to seriously slow down, a number of factors ironically fuelled the property market, which should have showed a similar decline.
The first factor was the government’s amnesty on undeclared money stashed in overseas banks. People feared they would be found out and brought their money back, about Lm500,000,000 of it, according to some estimates, and looked for a natural home. Where to invest? Coincidentally in the last four years there was a crash in the equity market, with big companies like Enron going bust and Argentina bonds crashing. Investment in equities was no longer seen to be safe. The result was a surge in demand for property, encouraged by the hype of politicians that there would be a huge demand for property with Malta’s entry into the EU.
The banks meanwhile were flooded with money with very few investment opportunities, such as hotels or factories to invest it in. So they began lending money to property developers. They were eager to lend, developers were eager to develop because they considered this a quick way of making a good return. They didn’t have much confidence in the economy, lacked trust in equity and bond markets and business and were reluctant to put their money in the banks that were paying exceptionally low interest rates.
Some banks adopted very liberal lending criteria to finance both property development and property acquisition. In some cases they were prepared to lend up to 100 per cent of the property being bought, accepted repayments which exceeded 30 per cent of net income, and were even prepared to grant moratoria of repayment of capital and interest for three years and more. Good practice with loans insist on a customer contribution of at least 20 per cent, and repayments should normally not exceed 25 per cent to 30 per cent of the net income of the borrower.
While interest rates remain at the present low levels these liberal lending policies can be managed for a time. But with the likelihood of interests going up, as most analysts agree will happen over the next few years, we are just storing problems for the future, with home owners being unable to pay their instalments.
There are already signs that the property market is slowing down. Small speculators are losing their appetite for property, seeing that prices can’t go up any further because the economy is growing at a much slower rate than property prices. There is already an over supply of property, which will eventually depress prices at which property can be sold. One sign of this is the way some speculators are selling the property they themselves have developed, on prime sites, to their own companies to give the impression that they are selling fast. Many argue that the future is not necessarily a mirror of the past; at least as far as the local property market is concerned.
Michael Bonello – Governor of the Central Bank
“The allocation of credit is driven essentially by market forces. The Central Bank of Malta can attempt to influence market behaviour only in an indirect way. It does so by reminding both the banks and borrowers of the risks entailed by the rapid build-up of mortgage lending, particularly when property prices appear to be out of line with economic fundamentals. Accordingly, in the statement published after the July meeting of the Monetary Policy Advisory Council, the bank specifically drew attention ‘to the recent rapid increase in bank lending to the personal sector, especially for housing finance’, and called for a prudent approach by banks and borrowers alike to avoid unsustainable increases in the levels of such debt.
“That warning was issued in the context of the Central Bank of Malta’s other major responsibility, which is to preserve financial stability. I would like to think that the risk appetite of both borrowers and banks is guided by rational expectations respectively as to the likely future course of interest rates and to the realisable value of property, which is the collateral banks hold against property loans. Since the future cannot be predicted with a sufficient degree of accuracy, however, it is clear that some risks may turn out to be excessive, such that some borrowers will be unable to continue servicing their mortgages when rates rise. Apart from the personal distress that would cause, which is regrettable on a human level, the occurrence of many such defaults in a short period would create a problem for the lending banks too, some of whom already have a relatively high proportion of non-performing loans on their books. In these circumstances, therefore, it is better to be safe than sorry.”
HSBC – Godfrey Swain
What is the minimum front end financing which banks expect from clients who apply for loans to purchase their residence? Does the bank ever finance property purchase with 100 per cent lending?
When assessing a home loan request we normally base our decision on three main factors; namely customers’ income and individual circumstances and also the value of the property.
The minimum contribution by customers is 10 per cent of the purchase price or the total cost of purchase price plus completion. Customers may also borrow an extra six per cent of the purchase price for contract related expenses. 100 per cent loans are normally only available when there is a bridge-over arrangement, when additional security is provided or when property is bought from the Housing Authority at a subsidised price.
What is the maximum contribution expressed as a percentage of net monthly income which the bank considers for determining the size of the loans it makes for property purchase?
In the case of single applicants, the maximum loan amount may not exceed four times annual income. When the loan is based on two incomes (joint applications), the maximum loan amount may not normally exceed 3.5 times joint incomes). In both cases, the monthly repayment may be up to 30 per cent of income (single/joint as the case may be). This is what we call the affordability test, and is a ‘check’ so as to ensure that customers can afford the proposed repayment. There will of course be exceptions but these are the rules.
Does you bank grant moratoria on the repayment of capital and/or interest in the first years of the term of a property loan? What is the longest moratorium that your bank grants to such borrowers?
A few years ago we launched Homestart, which is a repayment arrangement designed to help customers in the first few years of the loan. Homestart is a capital repayment moratorium through which customers have the option of paying interest only for the first three or five years. Loan is then repaid with a standard capital and interest repayment over the remaining term. Naturally, customers who take this option will have substantially reduced repayment during the initial period.
This feature is ideal for customers who are starting a family, are moving home or who have recently graduated or started employment.
What is the maximum term of loans which your bank grants for the purchase of property?
Maximum repayment is 40 years and loan is to be repaid by age 65.
(The same questions were asked to the Bank of Valletta but were told it was unable to submit any response for the time being.)
Sara Grech –Sara Grech Estate Agency
What is the rate of yearly price inflation (in the last three
years) for a typical three-bedroomed flat in Sliema/St
Julian’s and a similar property in Birkirkara? Can you quote price appreciation figures also for maisonettes and terraced
houses?
It is generally accepted that the value of property in Malta increases by approximately six per cent per annum. However the increase over the last three years has departed from the norm as seen in the table below.
2001 2004
3 bedroom apartments
Sliema/St Julians 65000 to 70000 85000 to 90000
3 bedroom apartments
B’Kara 32000 to 35000 48000 to 53000
Maisonettes B’Kara 40000 to 45000 55000 to 60000
T’Hse Swieqi - Ibragg 80000 to 90000 110000 to 130000
How is the residential property market performing at present?
The market is as healthy as usual less the speculation which was rampant in 2003 and the first half of 2004. All other sectors remain unchanged. The first time buyer still requires a home. Families starting off still require more space and do not seem worried about moving. Many of these families now find that they are sitting on un-hypothecated equity and the banking institutions are more than happy to finance those with a stable job and a good repayment track record. The opposite is also correct and those living in large houses and villas still move out into smaller units. Unfortunate but true, the number of separations still
creates the need for two units to replace the one occupied before whilst this new generation tends to move house more frequently.
To what extent is there speculation in the local property market, speculation being defined as people who buy property on ‘konvenju’ with the clear intention of selling it again in the short term before they sign the first sale agreement?
Over the past six months, after a strong rush that lasted 12 to 18 months most would-be speculators are working hard to off load their properties. The introduction of the registration laws in the last budget, coupled with the influx of new properties available on the market, and the realisation that not all EU nationals are going to want to buy property in Malta, has caused the would-be speculators to re-think their position. Sales for speculation purposes are therefore down by 60-70 per cent.