We hear that the property sector is suffering as a result of the economic slowdown in Europe. The announcement by MIDI − a leading property developer of luxury apartments − in its half-yearly results reveal a loss and directors expect this trend to continue in the second half of the year which will lead to an overall loss position for 2012.

Can this be a harbinger of a property slump? Simply put, there are over 25,000 finished luxury units seeking too few buyers. What contributed to the glut of unsold properties? No doubt the economic instability in Europe has not helped the local real estate market to handle an inventory of unsold properties and there are rumours that developers are showing signs of uneasiness about the cost of interest to continue servicing the cost of loans on prime developments which are not selling that fast.

Yet, paradoxically, real estate agents say there is no indication that prices on quality units have been trimmed down to bargain levels and that one can only see modest reductions in prices of finished apartments for first-time home buyers. In their opinion, it may take a while for a correction to be felt across the board but this assertion has not helped the nervousness of local banks that in the past have been forthcoming in financing luxury mega developments secured on projected future sales of what, compared to other Mediterranean resorts, can be judged as being relatively high priced.

One can say there seems to be a common trend in property bubbles that have already hit the economies of Ireland, Portugal and Spain where banks have been over extended to the construction sector. Sadly, in such countries, you now find investors complaining that they are sitting on negative equity. It goes without saying that in most countries you will find strong political support for the construction industry since this directly and indirectly contributes to a multiplier effect and acts as a major employer. So it is not unusual for banks to give the green light to speculative property ventures at a time when the property boom is at its height, knowing that riding on the crest of a property bull market itself guaranties a good return and property taken as collateral is a safe bet.

Certainly banks can charge premium rates of interest on such lending. It is a win-win position, while the property bubble yields higher profits for all and creates a much-desired feel good factor that politicians clamour for. But the party cannot last forever and, like in a game of musical chairs, when the music stops banks will face unpaid loans and have to search for more capital injections to cover their losses on inevitable “hair-cuts”. Suddenly, the recession starts to erode profits and gone are the savvy days when bankers could claim extra annual bonuses.

But how relevant is this tale of boom and bust to our local real estate market? The answer is given by a Commission report to the EU Council, which urged the government to take measures “to ensure the robustness of the financial sector”. This is not a reprimand, as our banks have strong reserves and have been reporting annual bonanzas of profits (BOV reported a 72 per cent increase in profits) even at a time when the economy in general was facing a slowdown. So why is Brussels urging us to take remedial measures in particular to correct the meteoric growth pattern in banking profit and what is termed as a “ noticeable increase in “problematic loans”

Our banks are monitored by regulators on a regular basis and file clean audited statements as a testament to their strength in facing the economic storms that have been severely hitting other banks abroad. The mystery thickens as the Commission goes on to describe the need to strengthen the financial sector as “a new challenge” for Malta’s long-term economic sustainability.

Equally relevant is the warning from Central Bank governor Josef Bonnici (himself an ex-member of the EU Council of Auditors) when he recently commented on the concentration of property-related lending and the popular use of property as collateral. Does his warning bring back a feeling of dejá vu when one recalls that 40 years ago a property slump in Malta saw the private banking sector seeking fresh capital to buttress losses?

This brings into the picture the saga of the National Bank of Malta, which was a pioneer in the financing of the island massive property and industrial development during the glory days of the mid-sixties. This period was a golden age for all types of budding entrepreneurs who, aided by a friendly banking service, boosted Malta’s economic progress to previously unattained heights. This was particularly seen in the wave of an unprecedented property boom that attracted foreign investors in droves to buy villas in rural areas such as in St Maria valley in Mellieha and other idyllic (mostly converted farmhouses) spots around the island.

Financing this unprecedented surge in property development was thanks to the foresight of managers at National Bank of Malta who had shown faith in the future growth and industrialisation of the island, which only a few years before was seen as a fortress economy heavily reliant on dwindling British military spending budgets. The balance sheet of NBM flourished and generated directly and indirectly a visible feel good factor.

These brief years saw full employment under the political guidance of conservative Prime Minister Dr Borg Olivier (the architect of Malta’s successful bid for independence in 1964) .The property bubble burst in the early seventies and coincided with the election of the Socialist government in 1971. The government witnessed the unfolding story of how the National Bank of Malta was rescued from failure caused by an alleged run by institutional depositors. The bank was nationalised without compensation to owners on the premise that the liabilities exceeded assets so the bank had no commercial value.

The National Bank of Malta business was then absorbed into Bank of Valletta in 1974 and the birth of a new bank was sealed with the issue of a clean audit report by Deloitte (auditors re- elected to the present day).

Reading from the first financial statements to 31st December 1974, one finds no note to explain the reason for the heavy provision for bad debts on the loan portfolio taken over from NBM. Observers note that, as it turned out over the years due to the active support of new management, much of the impaired assets were actually recovered and classified as profits. In fact, more than 78 per cent of bad debts were recovered in line with what the NBM had forecast in its 1973 interim accounts before it was nationalised.

There were strong protests from dispossessed shareholders who, after signing over their shares for free, now argue that it was strange that the Central Bank refused to act as a lender of last resort and is reputed to have blocked Barclays and other banks from helping NBM to avert what they assert to have been a short-term lack of liquidity. Regrettably, the issue is now part of a long running court case.

Political commentators admit that it is justice delayed that shareholders have not yet had a court decision and, although some of the original claimants have passed away, their heirs are still claiming compensation for the investments they lost. In a plea filed in 2010 by the Attorney General’s office, on behalf of the Prime Minister and the Finance Minister, it stated that the court case was time-barred since it was filed late in 1977.The government quoted articles in the Civil Code stating that to rescind a contract on grounds such as violence, error or fraud, a case must be filed within two years. In instances of violence, this period ends two years after the violence ceases.

The main civil case was filed four years after the National Bank of Malta was taken over by the government. With hindsight, one observes how the National Bank saga has been synonymous with court delays – several judges have presided over it and heard the plea of representatives of 300 shareholders who were allegedly coerced into handing over their shares for free. Now with so much water under the bridge and an election looming on the horizon, there are rumours that an out of court settlement with the government is on course.

The tale of the two banks (NBM as replaced by BOV) goes to show that with the passage of time one ought to learn from past experiences, in particular how to avert sudden losses resulting from the cyclical nature of real estate industry. As cautioned by the Central Bank governor, the time is ripe for local banks to take stock of the incidence of under-performing loans linked to the property sector in order to secure a soft landing should a property correction ever hit the island. Naturally, there is no reason to panic − once adequate precautions are taken in hand to arrest the trend of non-performing bank loans, then we can avert the repetition of a banking collapse caused by a property bubble which burst the NBM in the seventies.