The bull market in property

House price growth is outpacing increases in rents in the European Union, according to the statistics agency Eurostat. Over the last 11 years, house prices gained 34%, while rents increased just 16%, the data showed. In Malta, the comparable percentages were 51% and 21%. On a country-by-country basis, house prices increased more than rents in 18 of 27 EU member states, including Malta.

House prices decreased in only four countries. Malta’s jump was high but not as eye-catching as Estonia’s, where they climbed by 133%, or even Hungary’s, where they rose by 109%. On the other hand, declines ranged from 28% in Greece to 3% in Spain.

Between 2010 and the second quarter of 2011, house prices and rents in the EU followed similar paths, but those paths have diverged significantly since the second quarter of 2011. While rents increased steadily throughout the period up to the third quarter of 2021, house prices have fluctuated considerably.

After a sharp decline between the second quarter of 2011 and the first quarter of 2013, house prices remained pretty stable between 2013 and 2014. But in early 2015, there was a rapid rise, since when house prices have increased at a much faster pace than rents.

Deeds of sales in Malta in 2021 were up 29.6% on 2020 and 2.3% up on the pre-pandemic level.

The divergence between house prices and rents took off in early 2015, when house prices started to increase at a much faster pace than rents. Estonia saw the highest increase in rents, with prices rising by 142%. Malta was ninth with 21%. Greece had the highest decrease, where they fell by a quarter.

While there are differences in the rates of change of house prices and rents across the EU, there are also differences in home ownership. In the EU as a whole in 2019, 70% of the population lived in a house they owned, while the remaining 30% lived in rented housing. In Malta, the percentage is 80%, the tenth highest in the EU.

High rates of house price inflation mean that in some member states, wage growth can struggle to keep pace, putting the prospect of ownership further from reach.

In the five years leading up to the COVID-19 pandemic, 
real wage growth fluctuated between 0.7% and 2.1% in the EU, according to the International Labour Organization.

In Malta, the fluctuation was more marked ─ between 1.9% and 4.1%. Initial estimates for 2020, when the pandemic took grip, show a drop in real wages.

In part, the rise of house prices in Malta is due to the strong economic recovery since 2013, with its notable rise in employment, the sharp drop in the unemployment rate, and the import of thousands of foreign workers. The positive evolution of the labour market, together with a favourable economic outlook translated into higher household disposable income and greater consumer confidence. All this increased demand for housing, in turn pushing up prices.

Moreover, the environment of accommodative financial conditions created by the monetary stimuli of the European Central Bank also contributed to the rise of house prices, because it resulted in a generalised reduction of financing costs to historically low levels. 

For example, in the eurozone, the average interest rate for mortgage loans stood at 2.0% in Q3 2019, compared to 5% in the years before the financial crisis. Secondly, because the low interest rate environment pushed down bond yields and the returns of some financial savings products and that encouraged demand for property as an investment asset.

Looking at some statistics published by the NSO recently, deeds of sales in Malta in 2021 were up 29.6% on 2020 and 2.3% up on the pre-pandemic level, and interestingly the rise was more marked with respect to property bought by individuals, which increased by 31.6%. Even more striking was the value of property sales, which increased by a whopping 46.7% on 2020 and by 15.3% on 2019.

Of course, there is a downside to all this. The recent evolution of house prices could become a cause for concern. In spite of all the hype in the media, it is not so at the moment. In 2019 the housing cost overburden (those allocating over 40% of their disposable income to housing costs) only affects 2.6% of Maltese households, compared to 9.4% in the EU. And even if one looks only at those people at-risk-of poverty, the figure for Malta is only 9.2%, compared to 35.4% in the EU.

It is striking that 66.2% of Maltese families at risk of poverty, own their home.

One reason for this is that most Maltese households own their home. The percentage of such people is 82%, compared to a significantly lower 69% in the EU. Again, it is striking that 66.2% of all Maltese households at risk of poverty still own their home, compared to 50.3% in the EU.

Another benchmark indicator for the financial situation of households ─ their level of debt ─ is at a comfortable level if one looks at the debt-to-asset ratio. In Malta it is 13.5% versus the EU’s 25.5%. On the other hand, the debt-to-income ratio is quite worrying, being 110.6% versus 70.3% in the EU.

Rents had been rising fast in Malta in the years before the pandemic. During the period between 2006-2013, the rent of a one-bedroom apartment rose by 53%, whereas in the subsequent seven-year period it rose by 93%. The figures for a two-bedroom flat were 25% and 79% respectively. The combination of rapidly rising property prices and the impact of the demand from foreign workers is clearly evident from the figures.

A study by the Central Bank of Malta has revealed that rents decreased by some 10% in 2020, but the indications are that they began increasing again in 2021. Some anecdotal evidence points to a 5-9% increase.

Where house prices and rents will go in the next two years is an open question. It very much depends on the strength of the economic recovery and whether this will require the importation of a considerable number of foreign workers. Given the outcry from the hospitality industry about the lack of workers, this would appear to be on the cards.   

Rent controls are becoming increasingly popular in many European nations, though in Malta we have had to change tack to a certain extent due to a series of rulings from the European Court of Human Rights that found the 2009 rent control act in breach of owners’ property rights. The new rent control act of 2021 removed the more extreme features of previous legislation, but some experts argue that it will not solve the housing crisis on its own and can even scare investors away.

Rent controls will surely remain part of governments’ armouries that aim to cap house price increases, intended to keep housing affordable, at least for the most vulnerable parts of a population. But they are controversial. In Sweden, for example, rent controls effectively toppled the government there. In Germany, the matter was subject to a year-long legal battle.

More pro-active policies are required. One is the renewed social housing drive embarked on by the Government, after a long period of inaction. Another is the recent launch of an affordable housing foundation between the Government and the Church. Taxing people’s second and third homes could be another tool, though this is probably anathema to both political parties.

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