What is caus­ing the rise in prop­erty prices?

The Malta Independent on Sunday - - NEWS -

Lo­cal re­search ad­vi­sory firm ARQ Eco­nomic & Busi­ness In­tel­li­gence, part of ARQ Group, pre­sented Malta’s first house rental in­dex at a con­fer­ence or­gan­ised by Catholic Voices (Malta). Last Week, The Malta In­de­pen­dent on Sun­day gave an over­view of the In­dex it­self which high­lighted the move­ment of prices around var­i­ous re­gions and across a num­ber of prop­er­ties Ac­cord­ing to the data col­lected, North and West­ern re­gions, there­fore places such as Gzira, Sliema, Ham­run and Msida are re­gions which have suf­fered an in­crease in prices. This week, we look into the de­ter­mi­nants of such a sud­den in­crease in prices.

Economist and Man­ag­ing Di­rec­tor JP Fabri noted that when dis­cussing eco­nomic phe­nom­ena, such as in­creases in prices for rent, one needs to have a holis­tic view. Mar­kets hap­pen within nested en­vi­ron­ments and are af­fected not only by de­mand and sup­ply forces but also to so­cio-cul­tural and de­mo­graphic fac­tors. When look­ing at the de­mand side, a num­ber of fac­tors can be iden­ti­fied which in­clude the cur­rent and pro­jected state of eco­nomic growth, the pop­u­la­tion and labour sup­ply changes, the cap­i­tal en­vi­ron­ment within the coun­try whilst the sup­ply side re­flects on the num­ber of prop­er­ties on the mar­ket.

Fast con­ver­gence to EU av­er­age

Mr Fabri noted that one of the main aims of Euro­pean Union mem­ber­ship in 2004 was to con­verge to EU av­er­ages in terms of stan­dard of liv­ing, cal­cu­lated by GDP per capita. Mem­ber­ship was seen as a key el­e­ment of im­prov­ing Malta’s eco­nomic stand­ing and this con­ver­gence was the main driver for Malta’s large cohesion fund bud­gets. AT mem­ber­ship in 2004, Malta’s GDP stood at around 80% of EU av­er­age. Fast-for­ward to 2017 its at 95%. This fast-con­ver­gence, par­tic­u­larly af­ter the 2008 global re­ces­sion has been pro­pelled by a boom­ing econ­omy over the pe­riod since 2012. Malta has con­sis­tently out­per­formed EU mem­ber states and to­day we have a very growth-ori­ented eco­nomic model which nec­es­sar­ily means that pre­vi­ously low rents had to re­flect the eco­nomic ac­tiv­ity hap­pen­ing. (Chart 1)

Over the past 7 years, growth has av­er­aged 8.5% how­ever Fabri notes that it is in­ter­est­ing to see what has con­trib­uted to such growth in or­der to un­der­stand the make-up of Malta’s econ­omy and its eco­nomic di­rec­tion. (Chart 2)

From the graph, it is very ob­vi­ous that the econ­omy is mainly driven by ser­vices even though all sec­tors, in­clud­ing manufacturing have con­trib­uted to the hast eco­nomic growth. Pro­fes­sional ser­vices, re­flect­ing the fi­nan­cial ser­vices, has been im­por­tant con­trib­u­tor to­gether with gam­ing which has ac­counted for around 18% of such growth. Tourism and re­tail sec­tor has also been an im­por­tant con­trib­u­tor to this eco­nomic boom. The con­struc­tion sec­tor, although vis­i­bly on a boom, has not been a sig­nif­i­cant con­trib­u­tor and begs the ques­tion whether a good pro­por­tion of this sec­tor is still mis­rep­re­sented in na­tional ac­counts and eco­nomic data.

Un­em­ploy­ment plunges to low­est lev­els

Fabri noted that such eco­nomic growth, ne­ces­si­tates labour re­sources in or­der to sus­tain it. In fact, Malta’s un­em­ploy­ment rate has been at his­tor­i­cally low and close to what econ­o­mists would de­fine as the nat­u­ral rate of un­em­ploy­ment, that is close to fullem­ploy­ment. In fact, such an in­creased de­mand for hu­man re­sources has meant that many eco­nomic sec­tors both ser­vice­based, con­struc­tion-based and also tourism and hospi­tal­ity have been im­por­tant driv­ers for a surge in for­eign work­ers. Eco­nom­i­cally, Fabri said that although that for­eign work­ers have had an im­por­tant con­tribu- tion to sus­tain such growth, they also had a damp­en­ing im­pact on wages that would oth­er­wise have been ex­pe­ri­enced in a fast­con­verg­ing econ­omy. In re­la­tion to the rental de­bate, this has im­por­tant ram­i­fi­ca­tions since an in­crease in de­mand was also matched by a damp­en­ing ef­fect on wages, thus im­pact­ing it on af­ford­abil­ity since rents would have in­creased at a faster rate than earn­ings. How­ever, an anal­y­sis of the labour mar­ket will be pro­vided in another more de­tailed fea­ture. (Chart 3)

Apart from an in­creased labour force, driven by for­eign work­ers, Fabri noted that the tourism sec­tor has also ex­panded rapidly in re­cent years as shown be the in­crease in in­bound tourists. With the rise of the Airbnb gen­er­a­tion and other di­rect rentals of lo­cal

ac­com­mo­da­tion, the house rental mar­ket has also been im­pacted by such a grow­ing mar­ket. This grow­ing in­dus­try can also be prox­ied by the in­crease in prop­erty man­age­ment com­pa­nies that prom­ise the man­age­ment of book­ings, prop­erty clean­ing and other an­cil­lary ser­vices. How­ever, such a trend has also had an im­pact on the sup­ply of prop­er­ties avail­able for rental. (Chart 4)

In­vest­ments in prop­erty in­creas­ing land value and supp­ply

Fabri also noted that the cap­i­tal en­vi­ron­ment and dy­nam­ics is also an im­por­tant con­trib­u­tor. Sur­plus cap­i­tal will also move to higher yield­ing re­turns. With a his­tor­i­cally low-level of in­ter­est rates, cap­i­tal has been mov­ing away from bank de­posits in other higher in­ter­est yield­ing in­vest­ments. (Chart 5)

In fact, the fast-grow­ing econ­omy and prop­erty boom, has meant that fur­ther cap­i­tal kept mov­ing into real es­tate and the de­mand for land and prop­er­ties has in­creased. This flight of in­ward cap­i­tal has had the im­pact of in­creas­ing the value of land and this has nec­es­sar­ily im­pacted the rental price given that land has ap­pre­ci­ated. This flight into real es­tate is also seen through the in­crease in per­mits given with a faster in­crease in the num­ber of units com­ing on stream. (Chart 6)

Such an in­crease in devel­op­ment also begs the ques­tion on the role of credit to fi­nance such devel­op­ment. In ex­plor­ing the risks as­so­ci­ated with the prop­erty boom on fi­nan­cial sta­bil­ity, Fabri said that lat­est data re­ported by the Cen­tral Bank notes that although the strong growth in mort­gage lend­ing has pushed up house­hold debt, as a share of GDP house­hold debt dropped by 1.4 per­cent­age points to about 50%, be­low the euro area av­er­age. While mort­gages are granted at vari­able rates, cred­it­wor­thi­ness of house­holds re- mained strong sup­ported by their ro­bust fi­nan­cial wealth which ex­ceeded three times the size of their debt. House­holds’ fi­nan­cial wealth is pre­dom­i­nantly in cash or quasi-cash as­sets and but­tressed by pos­i­tive labour mar­ket de­vel­op­ments. Fur­ther­more, while house­hold in­debt­ed­ness is skewed to­wards young age cohorts, which are the low­est in­come-earn­ers; their ris­ing in­come prospects (com­pared to older age groups) mit­i­gate the skewed debt dis­tri­bu­tion.

Chart 2 Con­tri­bu­tions to GDP Growth Chart 3 Un­em­ploy­ment rate

Chart 1 GDP (PPS EU = 100)

Chart 5 ECB In­ter­est Rates

Chart 6 New per­mits

Chart 4 In­bound Tourists

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