Nobody disputes that an acute type of gentrification breeds a social malaise rendering property prices unaffordable particularly for low-income earners. While rising prices are a sign of economic growth, a sustained increase in house prices should not be taken lightly. A bubble causes lack of affordability for low-income earners or first-time buyers, and consequently some individuals end up digging into their savings to afford monthly repayments. In cases where borrowers cannot rely on parents to supplement their earnings, they will have to work longer hours to maintain loan repayments and find extra cash for daily expenses. A prolonged escalation in property prices may be a worrying trend, as expressed in a KPMG report commissioned by MDA and presented to the Prime Minister (see picture above). The report concluded that a property bubble is not expected to take place.
Other countries who endured a property bubble did eventually see it burst, leading to a rapid decline in house prices and bank failures as happened in Spain, Portugal and Dublin. This overheating occurs when increased demand, high investment and unbridled speculation lead to an increase in property prices until demand can no longer match the supply.
Why is Malta experiencing this unexpected boom in the real estate market? In a situation of positive economic growth associated with full employment, there is a tendency for individuals to have more disposable income. Furthermore, low interest rates coupled with easy credit terms by lending institutions make it attractive for individuals to take a property loan.
While not saying that a mismatch is prevalent, PKF is carrying out a study focused on conditions in the real estate market using scientific data and quantitative surveys.
In particular, through this study, a team of economists/statisticians will be analysing the complex factors driving up demand for specific categories of properties. PKF is doing this exercise as part of its Corporate Social Responsibility and is eager to share its results with readers.
The obvious question that follows is: Will the rate of increase in foreign executives renting high-end apartments be sustainable. Malta Employers Association president Dolores Sammut Bonnici expressed her concern on the shortage of workers needed to fill vacancies in the productive sectors. This shortage will augment the pressure for more foreigners to be recruited to sustain the current unprecedented rapid economic growth. One untapped source in the labour market is female workers who, on paper, register a participation rate below EU average. She bemoans the fact that despite government incentives to increase female participation rate and to encourage workers reaching retirement age to remain in employment, the desired level of female workers has not been reached.
When asked about worker shortages, Prime Minister Joseph Muscat said that if Malta is to sustain its economic growth it needs a steady influx of foreigners - at present there are 42,000 foreign workers, 12,000 of whom are non-EU citizens. Sammut Bonnici said that more foreign workers would mean greater demand for properties which in turn could place more stress on the environment. Can this be the start of a bubble?
The House Price Index issued recently by the European Commissions' data collection entity Eurostat shows that house prices in Malta increased from an index of 105.45 to 111.07 between 2016 and 2017, using 2015 as the base year. The Household Price Index measures the changes in transaction prices of new and already-existing dwellings purchased by households. Nonetheless, the rate of increase in prices in Malta has been slightly higher when considering the EU's average; an increase of 4.3 per cent in 2016 and a further increase of 4.4 per cent in 2017. As can be expected, the intricacy of a growing population and the spectre of a property bubble are keeping news editors busy during the silly season.
A number of articles have sprouted on the subject of unbridled population growth. Is this sustainable? Economist Gordon Cordina thinks the subject of population growth cannot be discussed in an "alarmist way". In his opinion "it needs to be managed in a way that is sustainable and leads to genuine progress".
Tempers rise as the summer heat takes its toll so it is not surprising that commentators criticise government for not intervening to stem the flow of foreigners and monitor the risks that gentrification creates particularly among the sans-culottes. The latter complain they are being evicted from rented premises by landlords who put up their rent. The story takes another twist when considering the concerns raised by MHRA, which warns about the steady increase of tourists. This needs to be balanced with the ideal number of beds that the island can accommodate.
The lobby group says that according to a performance survey taken in the first three months of the year, arrivals rose by 18.8 per cent over 2017, but profit in five-star hotels was down by 30.6 per cent. Perhaps political leaders need to learn a lesson from classical studies by prominent economists on how to solve this conundrum. Adam Smith and other classical economists saw the benefits of free trade results in increased prosperity. The ubiquitous "invisible hand" and the laissez-faire system of governance should normally lead to greater economic growth but this theory was contested by Malthus. He did not share the optimism about free trade and had some very dismal predictions about the future. His famous theory on Population growth and food supply was published in 1798; one can summarise his views saying that one needs preventative checks on the population growth to equate the food supply.
In conclusion, one questions how the island can sustain itself and maintain a healthy ecological balance if predictions on population levels reaching 700,000 are true. This is another reason why a PKF study will explore solutions based on the premise that people are feeling the pressure on the environment, infrastructure, roads, immigration, traffic, public transport and rents, among others. The land of milk and honey is paying for the sins of its successes.
[email protected]
Mr Mangion is a senior partner at PKF, an audit and consultancy firm.