Bubble, bubble... toil and trouble

During the conference organised by the newly set up ‘Property Malta’ last Thursday in which the current situation in the construction and property industry was analysed, a good number of points were raised. In fact, the conference started off by discussing the ‘Construction Industry and Property Market Report’ prepared by KPMG at the behest of the Malta Developers Association that were supported in this initiave by the three leading banks involved in house loans in Malta.

The most important issue is whether Malta is experiencing a bubble in the property industry and the resounding reply was simply ‘no’... probably much to the chagrin of the environmentalist lobby that has declared war on the construction industry. It is the environmentalist NGOs that started off the allegation that we have a property bubble in Malta or that we are heading for one - an allegation for which there was never any scientific support.

The scientific study carried out by KPMG makes good and interesting reading but I feel that the arguments that lead one to conclude that there is no property bubble in Malta are perhaps the most important for the general public.

The conference discussed the challenges in the current construction and property sector, mostly as indicated in the KPMG study: environmental issues including the problem of disposal of waste from the construction industry; the real life-time of concrete structures, especially those built in the 50s and 60s when concrete technology was not as advanced as it is today; the need for discussion on new models of ownership; enforcement problems; the notorious issue of vacant properties; and the economic challenge of the existing demand for  more housing units, because of changes in the lifestyle of Maltese citizens as well as a result of the cosmopolitisation of Malta.

Each of these subjects would merit more than an article about them.

The most worrying discordant notes were related to environmental issues, such as the fact that there is no official policy about the disposal of construction wastes. The supply of empty disused quarries is, in fact, diminishing and the formulation of a new building waste strategy is urgent. Another ‘environmental’ issue is whether purchasers are prepared to pay a premium when acquiring property that is more environmentaly friendly. From my experience, developers have given up on this simply because at the end users are not ready to fork out the ‘environmental’ premium and compare house prices superficially, expecting housing units built with environmentaly friendly measures to compete price-wise with units built without any such considerations.

Property was undervalued in the 1980s, overvalued in 2005 and in equilibrium as from 2009… one cannot conclude that we’re moving towards a bubble

This is also an education issue.

The booming rental market has also caused a demand from people who want to buy in order to rent their property in a situation where investing in property for renting out is more remunerative than practically all other types of available investment.

The study also indicates the areas where demand for housing units is greatest. To do this, I would have taken a shortcut and just measured the number of cranes per 1,000 sq. mts. in different areas of Malta. Everybody can say whatever they like about the nuisance created by cranes in building sites, but the fundamental economic truth is that supply and demand are always chasing each other.

The KPMG study concluded that there is no evidence of a bubble that is going to burst as has happened, not so long ago, both in Ireland and Spain. One of the indicators is that bank loans for speculative projects have dried up as a result of new banking policies. Today the current value of bank loans to developers has decreased appreciably while the building boom is going from strength to strength. This means that there are more people risking their own money, rather than other people’s money through bank loans - a sure indication that the spectre of a bubble is just a spectre.

The conference was also addressed by Owen Grech, Senior Economist in the Research Office of the Central Bank of Malta who concluded also - through completely different approaches - that there is no such thing as a property bubble on the horizon. He explained that a bubble occurs when there is misalignment between market prices and the underlying value of the property. His studies concluded that at present these two factors are in equilibrium, indicating that the posibility of a bubble is indeed remote.

Taking up this issue from the statistical approach, he concluded that property was undervalued in the 1980s, overvalued in circa 2005 and in equilibrium as from 2009. Taking up this issue from the econometric approach, the results were similar: house values today are close to the equilibrium situation and one cannot conclude that current circumstances lead one to believe that the country is moving towards a bubble, as the environmental lobby often alleges.

Every €1 spent in the construction industry has the effect of €1.70 in the economy – the highest multiplier effect for any economic sector in Malta

Staggering statistics

Those present at the conference were regaled with some staggering statistics:

- The declared gross value of property sales in contracts made during 2016 was over €2.50 billion.

- The industry creates 15% of added GDP in Malta.

- One out of every 9 employees in Malta works in the industry and related services: 37,275 jobs, equivalent to 11% of the working population of Malta.

- Every €1 spent in the construction industry has the effect of €1.70 in the economy, the highest multiplier effect for any economic sector in Malta.

This is the result of both the indirect and the induced ripple effect. In other words, the demand created by the final purchasers of property creates a new indirect impact demand for intermediate supplies and services, apart from what is known as ‘induced impact’

Attributing all this economic activity to ‘greed’ - in contrast with other sectors of the economy where, apparently, people are not greedy (!), is nonsense. That is not to say that the construction lobby is without its faults and cannot do much more to become a ‘friendly’ industry.

The problem is solved by more education, skills training, and environmental awareness.

Killing the goose rids one of her dirty droppings... but her golden eggs are lost as well.