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Property affordability at a micro level
01 Feb 2023

The topic of property affordability regularly makes headlines as this is a subject which impacts every household. Eurostat statistics show that in 2021, 81.9% of people in Malta were homeowners. Homeownership in Malta is the eighth highest in the European Union. At the same time, in Malta, the average number of rooms per person stood at 2.3 in 2021, the highest in the European Union, where the average stood at 1.6. This suggests that potential purchasers exercise a higher opportunity for a closer match between the size of the property and that of the household.  

To determine whether a property is affordable; or stated differently; whether the purchaser (or purchasers) can pay for it, the economic literature identifies a set of considerations: the total disposable income of the purchaser; the interest rate charged; the required down payment; the bank loan’s maturity; the notarial fees and the property taxes due. However, while the final property price is an important factor in determining affordability, the purchasers’ profiles are equally important and must be considered. At a micro level, property affordability reflects individual choice based on several factors, which makes affordability a more subtle argument than portrayed by aggregate statistics.

One such factor which tends to be overlooked in discussions about property affordability is the regional disparity in prices across the country. Although Malta is very small, differences can be significant and persistent. Neighbourhood effects remain strong when controlling for the other attributes which drive property prices. BOV’s property database, which includes information gathered from the transactions financed through mortgages, sheds light on this issue. For example, during the period January to November 2022, the average price for a habitable flat in Mosta stood at around €272,000. Meanwhile, the same type of property in Qormi was valued at about €218,000, approximately 20% less, despite a mere five-kilometre distance between the two localities. In 2022, the average gross income per purchaser (including joint holders) who purchased apartments in Mosta stood around €31,600, while in the case of Qormi this was estimated at €23,700. This gap, approximately 25%, is broadly comparable to the difference in property prices across the two localities. Since 2018, the percentage difference for this stylised case did not change much, as the price in both localities experienced an average annual growth rate of slightly more than 6%. The pattern is similar even if one were to consider median instead of average values.

Since 2018, the total average gross income of these purchasers grew by almost 25%, preserving the possibility of such property purchasing since it broadly mirrored the estimated rise in the property price. This example suggests that prospective homeowners deal with affordability constraints by self-selecting, opting for locations which are commensurate with their available financial resources. Benchmarking average property prices in Malta against the economy-wide average income misses out on the heterogeneity in Malta’s property market, which allows potential purchasers to focus on the localities that fit within their budget. The lower-priced regions ease the affordability for the lower-income households.

There is no reason why the price relativity across localities should remain constant over time, implying that even the households’ affordable target localities can and have changed over time. Indeed, economic theory suggests that the property price gap may widen or narrow according to the evolution of regional demand and supply. Areas in high demand (or short supply) will attract a price premium over localities that face subdued demand (or abundant supply). Various developments have supported demand for property in recent years, thereby allowing prices to rise further. These include the exceptionally low-interest rates; the expansion in household disposable incomes (reflecting both the increase in average wages and the higher female participation rate in the labour force); growth in population; higher demand for non-collective tourism accommodation; and the tax concessions offered by the Government.

Another stylised example from BOV’s property database can highlight this aspect better. Economic theory suggests that, during the COVID-19 pandemic, areas characterised by the high concentration of property which is rented primarily to foreigners would have experienced a decline in prices, as the buy-to-let motive probably eased. In fact, according to BOV’s internal estimates, in 2019 the price for a Sliema flat of between 100 and 125 metres squared averaged €327,000, whereas in 2021, the price of the same type of property averaged €310,000. Since then, the price recovered and has exceeded the pre-pandemic price, in line with the full recovery from the pandemic. Although property prices in Malta are perceived as somewhat sticky, it does not mean that market fundamentals cannot exert any impact on price.

When discussing property affordability, one should also acknowledge that all else equal, the same property purchased by a couple becomes more affordable than if purchased by a single person. Another relevant consideration is the size of the property. BOV estimates for 2022 indicate that a flat whose size ranges between 125 and 150 square metres, offered a discount of almost 20% compared to one ranging between 175 and 200 square metres.

Looking ahead, fresh challenges for future property affordability may arise because of the increase in construction costs and the possibility of higher interest rates. On a positive note, all macroeconomic forecasts for Malta available to date suggest that the economy (jobs, wages and business activity) is expected to continue growing, which is key to supporting both property prices and affordability.   

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).