A study by KPMG, which was commissioned by the Malta Developer’s Association, has found that housing is continuing to become less affordable, with the Housing Affordability Index decreasing for the second year in a row.
The Housing Affordability Index measures whether a household earning the median wage income would qualify for a mortgage on a median priced property. With a score a 1 on this index, it would mean, as said above, that a household earning the median wage income would just about qualify for a mortgage on a median price property.
By extension therefore, anything below 1 then means that a household earning the median income would not qualify for a mortgage on a median-priced property, effectively meaning that they need to search for something cheaper.
One of the main takeaway points from the report is that the Housing Affordability Index has decreased for another year, with the affordability index for an apartment falling to 0.8040 from 0.8320, for a maisonette falling to 0.7236 from 0.7937, for a penthouse falling to 0.5653 from 0.5807, and for a terraced house falling to 0.3886 to 0.4065.
The report reads that the decline in the Housing Affordability Index is to a large extent driven by the increase in the price of the median property. It notes that affordability decreases by 48% if a mortgage is taken out by a single individual, but that increasing the mortgage term from the average of 29.64 years to 40 years will improve affordability by 19%.
The report looks into the risk of a housing bubble. It defines a housing bubble as a situation whereby the property prices do not reflect the underlying economic fundamentals, which can then burst if demand suddenly stagnates or declines.
The conclusion reached is that there is an upward movement in property prices on average, but the report notes that as long as the price increases are generated by stable and growing demand then this should not present a threat to the health of the property market.
It does note however that the slowdown on price growth and demand as of the start of 2019 has caused some MDA members to adopt a more cautious attitude in light of what they believe to be over-inflated prices, and an increased risk of oversupply in the market. They further noted that a number of tests carried out – such as Real House Price gap, Property price to income gap, dwelling investment to GDP gap tests – all point towards symptoms of an overheating market which may be approaching a plateau.
In terms of the economic impact, the report noted that the construction industry generated 36,282 direct and indirect jobs, along with a further 6,719 induced jobs – bringing the total to around 43,000. It was also estimated that the construction industry contributes €1.056 billion to the Gross Value Added, which equates to 9.75%.
KPMG also found that rental properties priced at under €1,000 a month are in short supply and properties at under €600 a month are very limited while it was noted that there may be an excess supply of properties in the mid-range, typically priced between €1,000 and €2,000 a month.
Speaking at the conference, Prime Minister Joseph Muscat noted that since 2013 Malta’s GDP had doubled, and noted that he was certain that this economic pace would be maintained. However, he warned against the presence of greed, saying that greed can poison these achievements and warning that this word must be completely removed from everyone’s system.
He said that there are three “firewalls” which guarantee that the construction industry remains sustainable. The first is the businessman’s ability to feel the pulse of the market, the second is the banks who will never facilitate a project where they are not sure about the return on the initial investment, and the third is the state itself which is ready to put a stop to everything if it sees fit.
Noting the moderation in the prices, Muscat said that this is a sign that the market is regulating itself and becoming more realistic. A fundamental point however that the report revealed is that the construction and property sector is growing because the Maltese economy is growing, and not the other way around.
Sandro Chetcuti, who is the chairman of the Property Malta Foundation and the President of the Malta Developer’s Association, said that the construction industry is the industry which creates the biggest multiplier effect and which spreads most wealth.
He noted that the country requires better and more long-term planning and to look towards taking care of the affordability of housing, while also addressing the challenges that the industry is facing, such as that of construction waste – wherein he noted that the government must decide what it is going to do as the industry is now stagnating.
Transport and Infrastructure Minister Ian Borg meanwhile spoke on a wide stretch of subjects, but significantly noted that it was not acceptable for key policy reforms – such as the Fuel Station Policy and the Rural Policy – to still not have come into law.
Speaking about the construction waste issue which Chetcuti referred to, Borg said that the industry was in a crisis because the situation had been left untouched for a number of years, noting that it is the duty of the government to create a good climate for the disposal of construction waste which cannot be reused.
Speaking about this topic, he referred to land reclamation projects, saying that there is the need for courage like our forefathers who had carried out such projects in Msida, Marsa, and the Freeport.
