How the Maltese property market was saved

In early 2020, the Maltese property market gave signs it was going to tank. After innumerable years of very healthy activity, transactions plummeted. The number of final deeds of sale fell from over 1,000 in previous months to little more than 550 in May 2020. The total value of property bought halved to just above €100 million. The future looked dire. The number of promises of sale that were entered into, fell from 1,200 a year earlier to just under 270, marking a decline of over 75%. At the end of the first quarter of 2020 house prices were 4.4% below their end-2019 value. To give some perspective, in the rest of Europe they were 1.4% up.

Property is the main asset of Maltese households. Which means that if the property market tanks, the impact is not, as some commentators argue, mostly felt by property developers. The impact falls hardest on average Maltese families. From just that initial drop the average Maltese family would have had a fall in its net wealth equivalent to 8,800, wiping away two years’ worth of its previous savings.

Besides, as pointed out by innumerable IMF and rating agency reports, a house price shock in Malta, given the concentration of mortgages in banks’ loan book, would have strong impacts on banks. The latter would need to increase their provisions, to make up for the falling value of their collateral and heightened risks, cutting off their supply of credit to the economy. A look at credit figures for the first part of 2020 confirm that Maltese banks were very quick to react. In April 2020, the total amount of loans granted by local banks fell by 40 million. This decline in credit would transmit the impact of falling house prices to other economic sectors, which would be drained of the finance they need to operate.

Government, beset with so many challenges, may have been tempted to look aside and concentrate on other issues. This is, after all, what the government had done in the 2008 financial crisis. In the second quarter of 2008 Maltese house prices fell by 4.1%. No policy action was taken. Banks started to tighten credit, as the ratio of non-performing loans doubled. The number of permits issued halved almost immediately. The impact was not fleeting. Official data indicates that even in 2012, the volume of property transactions was still a quarter below that in 2008. The house price correction of 2008 was undoubtedly one of the prime causes of the lackluster performance of the Maltese economy in subsequent years.

Reflecting this consideration, the current administration undertook several actions to sustain the property market. The first crucial measure was to introduce a moratorium on existing loans. This meant that banks had to give a temporary holiday for borrowers who were affected by the crisis. By end July a tenth of all households with a mortgage, around 7,400 families, were benefitting. Instead of facing financial problems, that in a worst-case scenario could have led them to face a foreclosure and have to sell their property, these families went on with their lives.

Instead of facing financial problems, that in a worst-case scenario could have led them to face a foreclosure and have to sell their property, these families went on with their lives.

This assistance was a success. The number of families still depending on the moratorium is now down to less than 740, or just one in a hundred of families with mortgages. The fact that existing homeowners were not hit hard, reduced pressure on the housing market and prevented it from tanking. Whereas in the immediate months after the pandemic, local banks reduced their credit for house purchases, since then it has risen by over €400 million.

Government was not content with stopping the market from dropping. In June, policy turned on the offensive. Announcing an unexpected temporary cut in stamp duty, Government provided an incentive for those households with ample liquidity to use this to go up the property ladder. The measure has been incredibly successful. Instead of continuing to fall by half, property sales went back to their previous level and then started to improve. The table below shows trends pre- and post-stamp duty reduction. The signed final deeds of sale are slightly above the previous amount, while the trend of falling property prices reversed. More importantly, the number of promises of sale has skyrocketed, rising by nearly 60%. To give some perspective, this April 1,430 promises of sale were signed, five times better than in 2020, and the highest number on record.

The full economic impact of the stamp duty reduction will only become evident in the coming months when these promises of sale become final deeds of sale. All those involved in home furnishings, appliances, property embellishments and anything related to property are in for heavy demand in the coming months.

The usual suspects will argue that this is another case of the Government jumping in to save its developer buddies. The reality is that this measure was a godsend for Middle Class families. Instead of worrying like in 2008 about falling property values and bank restraint on credit, this time round, the situation is completely different.

This positive impact underpins the surge in consumer sentiment, which many economists believe will cause domestic demand to spike in coming quarters driving economic growth towards the top of the EU’s league table. More importantly Government prevented the crisis from falling on the shoulders of families and instead through a set of well-thought measures, continued to sustain their welfare.

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