Property market unlikely to rebound in short-term

The Central Bank has warned that the gap between the supply of unsold property in Malta and demand means the dampened property market is unlikely to rebound in the short-term.

Adding more concern for some construction mega-projects, was the Bank’s warning that global uncertainty on property prices abroad was curbing interst from foreign buyers, and that this would affect the feasibility of construction projects in Malta targeting the high-end property segment.

Credit risk – and how a decrease in property prices would affect banking collateral – loomed large in the Central Bank’s financial stability report, published issued today. Specifically, it said that in 2011 some economic sectors will maintain a strong momentum; but others with large credit from the banks were likely to lag behind.

“Repayment difficulties by borrowers, which have already been manifested throughout 2010, may become even more pronounced during 2011, particularly in sectors where non-performing loans are already high.”

The Central Bank warned banks to keep a close eye on business performance if they wanted to minimise potential losses from the high credit risk, singling out property and its effects on bank hypothecs.

“The continuous upward trend in property prices for more than a decade has resulted in ‘disaster myopia’ – an illusion that property prices never fall – with banks using a conservative valuation of collateral as a prime mitigating factor,” the Central Bank said.

The banking sector remained resilient in 2010 thanks to strong capital buffers, but the Central Bank said the effects from a weakening in global economic conditions could affect the construction and real estate sector, and even “propagate to other economic sectors”,

In fact it made special mention of the heightened credit risk from banks’ large exposures to the real estate sector as one of Malta’s main vulnerabilities.

Banking stress tests in 2010 found Malta’s banking sector remains largely resilient to a reversal in economic conditions and a significant fall in house prices. “Since the risk outlook suggests that conditions will remain challenging, strong vigilance is required,” the Cental Bank said, calling on banks to have sufficient capital buffers against greater credit risks.

Other risks

Other risks to the economy included the effects of prolonged political turmoil in North Africa and the Middle East and possible valuation losses as a result of the ongoing sovereign debt crisis. The halt in activities due to the turmoil in Libya – which accounts for 3.8% of total exports – as well as any significant slowdown in the main tourist markets could have a negative impact on employment earnings.

And high inflation of some 2.5%, would also add further pressure on people’s disposable income. “Relatively high inflation (which is particularly sensitive to possible spikes in international oil prices) is expected to further erode households’ discretionary buffers, particularly since average incomes are not envisaged to regain a strong momentum.”

The Central Bank said keeping Malta on the road to deficit-cutting was crucial. “Maintaining public debt dynamics under control is important, as experience from other countries clearly indicate that sustainable public finances are a pre-condition for financial stability."