Economic history teaches us that more often than not, an economic bust is the result of the fallout from the collective hysteria attributed to an asset or a class of assets by a population drunk on false financial expectations. The most recent example of this has been the dot.com bubble. Remember that? Remember when in summer of 2000, the market capitalisation of Amazon.com (that had never in its short history registered a dollar of profit) was greater than that of Boeing? Remember when the value of pets.com was approaching that of Nike. This very recent incident was so well coined by Alan Greenspan’s statement describing the collective madness as “irrational exuberance”. The dot.com bubble was not unique in history. The California gold rush of the mid 1800s dealt with a different commodity, but had very similar repercussions. The Dutch tulip-mania, 200 years previously, was another period during which a whole population succumbed to collective financial madness; this time attributing ludicrous economic value to flowers that had a life cycle of a fortnight! Even more recently we had several Maltese sink many millions into the bubble of Argentinean bonds that was “promising” astronomical returns. It seems that history does in fact repeat itself and people never do learn.

I often wonder whether Malta’s property market is our very own peculiar flirtation with “irrational exuberance”. I am sure that many of you at this point will be shaking their head in disagreement. But hold on, at least for a minute – so did many prospective prospectors disagree with the sceptics and poured their fortunes (and their lives in a number of cases) into the gold rush. At least as many Amsterdamers ignored the (few) critics and spent a good part of their fortune purchasing tulips they knew would die before the end of the month. Tens of millions poured their life savings into Internet companies that didn’t stand a chance of a snowball in hell of ever justifying their market value. Everyone just believed that the next buyer was a bit more foolish and a lot more exuberant than they. So why is the Maltese attitude towards property so different? Are we so rational in this regard? Are the economics laws of this island different from the rest of the planet, as Ms Caruana Galizia would have us believe?

I am sure that if you flip through the classified pages in this newspaper you will find a good number of properties “offered” (what a word!) at more than a quarter of a million Maltese liri. If it is your lucky Sunday, some of them may have a pool, or (forgive my sarcasm) space for it! If you are not in the market for million dollar properties, then you eyes will stray away and stop on the more “reasonably” priced ones. Flats with three bedrooms for “only” Lm70,000; three-bedroomed maisonettes under a “bargain of the month” subcategory at Lm90,000 – garage optional at Lm8,000, and if you are looking for a bachelor pad, then 35 grand will do the job! Now, in all truthfulness, isn’t there something wrong here? Doesn’t the word “bonkers” spring to mind?

There are many who argue that the fundamentals of the local property market are different. The list of reasons (excuses?) is long. “Malta is a small island” – “We have a high population density” – “The Maltese are house proud” – “We love a nice home” – “Property never goes down”. These are the same excuses many Japanese gave 15 years ago to justify the astronomical level of real estate prices – most famous example of which was the Imperial Palace reaching the value of all real estate in California, USA! Remember what happened then? Prices came tumbling down and the economy ground to a halt as a result – that country has not yet fully recovered. Japan has a high population density, its people love their homes and relatively speaking (for 200 million) people Japan is actually a small island. The Japanese have huge savings in their financial institutions, little household debt, a large budget deficit and a ballooning national debt. Sounds horribly familiar doesn’t it?

Any declaration that Malta’s property market is somehow immune from economic rationale is perilous. The quasi-religious belief that property values never fall is ill conceived, because what is the value of a property? If somebody advertises his maisonettes at Lm95,000 and after four months does not get a single offer, he decides to lower the price to Lm 88,000 because the bridge loan is just to heavy to carry, has that property fallen in price or was the initial price just way off the mark? When a rich foreigner signs a check for Lm600,000 to buy a villa in Madliena, does the value of all the properties in neighbouring Swieqi and St Andrews (including every single pied-a-terre) increase by 10 per cent? Possibly, but not definitely. The danger is that most of us have come to believe that this is not a possibility but an absolute certainty; if a neighbour has sold her property for Lm100,000 then it automatically means that mine is worth at least Lm120,000. Forgive my cynicism but if this is not irrational and exuberant, then will somebody please tell me what is? When our properties lose all connectivity with any economic fundamentals (e.g. incomes, opportunity costs, interest rates), what is left apart from speculation and sheer vanity?

The fragility of this situation is highly dependent on the cost of borrowing. We all borrow to the limit and a teenie-weenie bit more. When we sign the deed of purchase-cum-borrowing, we do not reckon with the possibility of interest rates going up after the initial two-year period of fixed interest are up; the emotion of the moment is just too great; I know, I have felt it. So many of us do not realise that a mere tow per cent rise in interest rates (certainly possible over a 40 year period) will increase the monthly repayment on a Lm40,000 40-year loan from Lm210 to Lm307 – a whole Lm97 per month (after tax) – if one is paying the top rate of tax then the increase in repayment is a whooping Lm150 – will the second job cover this or will a third one be necessary? What will the value of that same property be if the European Central Bank (after 1 January 2008) were to put up interest rates by two or three per cent.

We have a property bubble, but we cannot afford a bust.

The repercussions would be economically catastrophic. The little economic optimism left would vanish in an instance. Many of us who have borrowed to the hilt would be left servicing mortgages that are greater than their home equity. The speculative “vultures” would move it to mop up the carnage, affording to wait long enough for prices to rise once again and cash in handsomely, eventually. Requisitions may be back to prevent the Housing Authority collapsing under the ensuing pressure; many will weep over the absence of a properly functioning rental market. God alone knows how the banks will react to all this. The ensuing social consequences arising from a bust I will leave to your imagination.

Unfortunately, there aren’t many immediate remedies available to prevent the bubble bursting. Apart from being outright immoral and ultimately unworkable, price regulation as some Labour MPs are suggesting, would precipitate the situation further and quicker into chaos – like any price control measure it will have the opposite effect, creating an uncontrollable black market in the process. Who will determine the value of property – the Housing Authority chief?

What the Green Party believes the government can do is to re-create the property market through a reform of our rent laws and a serious drive to re-activate vacant properties. Releasing vacant property stock onto the market will take some pressure out of this bubble. This strategy is the only one put forward by a political party – our adversaries are busy cajoling lady luck hoping that the bust will not happen, at least not when they are in government. Hope is not a strategy, at least in our book!

Edward P. Fenech is spokesperson on Finance, the Economy and Tourism of Alternattiva Demokratika – The Green Party