Many of the conditions that could create a bubble are currently present in Malta’s housing market, but there doesn’t seem to be one forming just yet, according to Professor Andrew Narwold, who cautioned that the risks were still there and were being keenly monitored.
“In terms of historically low interest rates, and the influx of foreign buyers and renters, it’s putting a lot of pressure on the market which you want to watch closely, but there doesn’t seem to be a bubble forming,” said Prof. Narwold, an expert in the macro-economics of the property market, who is using his extensive housing market experience and research to help the Central Bank of Malta develop Malta’s first-ever housing price index. “There are underlying conditions that could create a bubble – there is a possibility; but I think the Central Bank is doing a great job of monitoring it.”
Prof. Narwold, who is based at the University of San Diego in California, said that the housing market in Malta paralleled the situation in San Diego. “If you go down this list of housing market issues in San Diego, you could be talking about Malta. There’s restricted housing supply, and huge growth – for us, it’s domestic workers, but for you, it’s foreign workers – as well as historically low interest rates. I understand there are also the beginnings of homelessness in Malta – it’s something that’s been long established in the States, but a new phenomenon here. In San Diego, housing prices have gotten so high, people are living in garages and building illegal structures. When I said this to my colleagues in Malta, they said, yes, all that is happening here, too. It has been really valuable talking about what these issues translate into, and whether they’re a result of what’s been happening in the market or a cause.”
What could lead to a bubble locally, Prof. Narwold said, was if, for any reason, the continued influx of foreign workers were to reverse itself; in other words, if foreigners stopped coming to live and work in Malta. “You’d have a lot of people investing in potential property without a lot of people to take it, and that could cause a dramatic readjustment. It’s unforeseeable at this point, but if [the number of new expats in Malta] were to dry up, you would have an oversupply of stock that you would need to readjust.”
However, he emphasised that even if a hypothetical property bubble were to burst, it would not affect Malta as severely as it would other countries. “There are things, culturally and mechanically in the Maltese economy, that would preclude that great oscillation that you would see in other countries. In other countries, there are highly-leveraged people borrowing money to invest in hot property and then when the prices fall, they have to get out, leaving all these distressed properties on the market.”
“But a lot of the Maltese that are investing in buying a home to rent, or a second property are all-cash purchasers. So if there’s a price readjustment, they’ll say ‘okay, I wish that hadn’t happened,’ but they won’t be forced to run out and liquidate their property. And with no property taxes, you don’t have to worry about getting a return right away.”
Yet the lack of data means that it is difficult to determine when housing markets turn, and whether prices have increased excessively. Indeed, Prof. Narwold remarked that the lack of a visible property price benchmark often led to uncertainty about the appropriate prices, which led property owners to adjust prices based on little more than hearsay. “You hear landlords saying, I’ve heard about someone raising prices by 20 per cent – let me try that and see what happens. Lack of information might lead to expectations which are not really in line with what’s happening in the market – on both sides.”
Indeed, the housing price index which he is working on developing with the Central Bank is a completely new concept for Malta. “While Malta has an advantage over the US in that it has a much smaller market, the lack of data is a disadvantage. Historically, Malta has not collected as much information about the property market – it has not needed to do so, unlike the States, where the valuation of every property, from the number of square feet to the number of bedrooms and bathrooms, is needed to determine the housing tax.”
“What we’ve been working on with the Central Bank is an index based on a sample of residential properties in Malta sold over the past eight years, which required a mortgage to buy,” he explained. “Mortgage data does not provide a perfect index, but since it actually looks at the characteristics of the house, the square metres, the kind of property and where it’s located,
and includes the architect’s report and the contract price, it gives us a more robust idea of what’s happening in the property market. Then, we will try to use those individual characteristics to develop a housing price that’s more quality controlled in terms of what’s selling.”
The exercise is still being developed as a working paper for the Central Bank’s own use, and there are no plans as yet to release it as a formal housing index which is accessible to the public. “The Central Bank is working to reduce the amount of uncertainty so they can be proactive if they see that things are getting out of control. But potentially, if it proves robust enough and tracks well enough, [the Central Bank] may consider releasing it,” Prof. Narwold said, adding that there are also plans in the pipeline to replicate this exercise with rental and leasing prices.
It’s his sixth year visiting Malta, and Prof. Narwold said he enjoyed observing the parallels and the differences between Malta and the US, both in terms of markets as well as mentality. “There are cultural differences and structural differences –our thoughts on how to tackle a similar problem can be very different.” In Malta, he observed, Government housing policy tended to be far more interactive than it was in the US. “For example, while the rising prices in the property market
have made many Maltese households very wealthy on paper, because the price of their assets has increased, there have been people who have lost out. And from what I can see and hear, the Maltese Government has done a good job of being sensitive and helping out those who have had some difficulties – more willing to fine-tune policy in terms of introducing additional programmes to assist people with first-time housing, or introducing rent subsidy increases to compensate for higher rents.”
“In the US, the Government usually lets the market sort itself out. But in my perspective, Malta is much more aware of being fair – we don’t want people to be left behind.”
Prof. Narwold’s US Fulbright Specialist Programme was sponsored by the US Embassy in Malta.
This interview was originally published in The Malta Business Observer.