ARTICLES
How will property prices go down?
February 4th 2007
Robert Musumeci
Architect Robert Musumeci, chairman of the Building Industry Consultative Council (BICC), argues that any intervention to control market prices or halt further building development will spell economic disaster
It has been recently recalled that over 3,300 new apartments will be built in just six sites alone while over 60 other pending applications will pave the way for hundreds of apartments in Sliema. At the same time, it is being consistently reported that negotiators are claiming that several developers are suddenly realising that supply is exceeding demand.
The truth is that purchasing a property has always been a source of concern for first time buyers, not least in those times when land prices were much cheaper than today because the building boundaries saw no limits.
These were times during which earning opportunities were dwindling and only relatively few had ample opportunity to secure a home loan.
A competitive mortgage market was in reality inexistent, and those who managed to secure a loan were nonetheless forced to curtail other exigencies in order to be able to afford their mortgage.
Yet our standard of living has come a long way during the last decades. We have experienced more job opportunities, with women playing a more significant role in modern society, and therefore couples can afford two sources of income.
Accessing a home mortgage became even more possible due to the ever increasing competition in the Maltese mortgage market spurred by local banks, not least APS Bank, which started reducing charges and offering attractive low rates.
Buying a property was rendered a more attractive option as mortgages were more or less equivalent to a monthly rent. Low interest rates stimulated higher demand since home buyers found it relatively easy to raise mortgages.
The natural result was that investors concentrated their investments on real estate in the prospect that property appreciates more than other forms of investments.
Current over supplies are therefore a direct result of these past trends, which in turn explains that current market scenarios do not necessarily reflect current needs.
In turn, this could well mean that although the present circumstances point to excess supply, this may not be the case in a few years' time if, as suggested by a section of our political spectrum, one were to refrain from issuing further planning permits on the premise that the current supply exceeds by far emerging demands.
It is worth underlining that even though there is an adequate supply of apartments between the Lm32,000 and Lm35,000 range in certain locations, the majority of buyers continue to opt for three-bedroomed apartments within the Lm45,000 to Lm55,000 price range, with certain locations being preferred than others.
This is because first-home buyers tend to opt for a permanent residence as a one-time long investment. In other words, buyers are actually prepared to pay high prices in the prospect of continued capital appreciation.
In parallel, vendors continue to hold to their property in the safe prospect that a safe profit margin will be attained in the foreseeable future.
If, on the other hand, several developers are all of a sudden realising that reasonable profit margins are no longer attainable within reasonable timeframes due to excessive market supply, it is in their interest to dispose of their property at discounted prices within the affordable range.
Although this phenomenon has never happened before, there is no absolute guarantee that property prices cannot fall in the future. If interest rates are set to increase, it may be safely predicted that vendors would in no time be forced to release their property at lower market prices, being unable to cope with high interest rates.
This signifies that higher interest rates will no longer make it possible for most vendors to hold on to their property, since the interest carrying cost component will exceed the prospected gains that can be realised by holding out for potential higher prices.
This of course assumes that, contrary to what has been suggested by some political quarters, MEPA will continue to issue more building permits to secure the continued perception of excessive housing stock. Otherwise, vendors will certainly hold on to their assets.
No marketable property registration numbers which, as suggested recently, are to be quoted in every notarial sale deed, would bring property prices down. If anything, this would only lead to rampant tax evasion, having not to declare the "good will" money against which vendors would be set to release their property.
Neither the liberalisation of the old rent laws will influence the net market supply, since a new stratum in society seeking alternative accommodation, having vacated the old rented property, must resort to the market.
This does not mean that the country should refrain from discussing old rent laws, and strive towards political consensus. It only means that revising the old rent laws is not the solution to lower market prices.
More significantly, any government's intervention to control market prices or halt further building development, will only spell economic disaster.
A collapse in the market underlined by lower property prices will eventually follow as a direct result of this disaster.
Do we really want this to happen?
Courtesy of The Sunday Times www.timesofmalta.com
For further details call Jeffrey Buttigieg on (+356) 9947 5620.
