Residential property market and mortgage lending – current state of play | Kenneth Farrugia, Gordon Cordina

In Malta, households’ annual purchases of residential properties surpassed 13,000 both in 2021 and in 2022. The corresponding yearly value of residential property which was transacted amounted to around €2.6 billion.

Bank of Valletta is the leading provider of home loans in Malta, serving around 25,000 households, with a total value in the region of €2.7 billion, or approximately 40% of the total for the country. These figures highlight the centrality of the residential property market in Malta’s economy and in BOV’s business.

The decision to borrow money from a bank to finance the purchase of a residence is a key moment in a person’s life. Purchasing property is the largest investment which most people will ever undertake. Property is also a unique asset since one can enjoy its use and concurrently it can serve as a store of wealth.

At the same time, BOV draws attention to the fact that property should not be considered as the exclusive channel of saving. Households are invited to consider other products such as long-term financial investment and pension plans, which are becoming increasingly worthwhile for savers.  There are highly interesting tax incentives for both the employer and employees under the Pillar 2 Voluntary Occupational Schemes, as well as additional tax incentives for personal investors under Pillar 3 pension contributions.

BOV pays close attention to the prospects facing Malta’s housing market. There is a continuous assessment to verify that the repayment capabilities of the current borrowers and prospective homeowners are adequate to service their mortgage. The Bank is cognisant that it is exposed to the risk that the borrower’s real disposable income suffers an unexpected significant hit, either because of a large decline in income (with the worst scenario occurring in the case of unemployment), or else due to an increase in the cost of living which makes it hard to make ends meet.

In February 2023, a suite of economic forecasts about Malta were published, by the European Commission, the International Monetary Fund, and the Central Bank of Malta. These forecasts all indicate that despite the economic headwinds, over the next few years the Maltese economy is expected to continue growing, by slightly more than 3% per annum in real terms. There is also consensus that Malta’s unemployment rate is likely to continue hovering close to record low levels, while inflation is expected to cool off slowly. Such benign macroeconomic outlook supports BOV’s confidence in the repayment capability of mortgage borrowers.

Another risk which is closely monitored by BOV relates to the possibility that the value of the property declines to such an extent that the borrower may be tempted to default on the loan. Cultural and legal factors suggest that Maltese households tend to consider defaulting on their home loan as the last resort.

Furthermore, economic conditions do not give rise to concerns of some generalised decline in Malta’s property prices in the pipeline. Rising incomes, a growing population and fiscal incentives have supported property demand over the years. It may be possible that in future their sustain might diminish, but this is unlikely to vanish altogether. At the same time, the decline in the number of building permits, when compared to the record years, supports the narrative that property supply and demand dynamics can converge in a smooth manner, without destabilising price effects on the market.

The house price misalignment index published by the Central Bank of Malta does not identify any property price overvaluation at the moment. The country’s economic fundamentals and varied sources of property demand offer good support to the value of properties. This downplays concerns about the existence of a property price bubble.

One must also consider that Malta’s property market is variegated, and the often-mooted concern about affordability appears to be addressed by the availability of properties along a wide price spectrum. Affordability is further facilitated by the various assistance schemes provided by the Government, which cater not only for first-time buyers but also other cohorts, such as those with difficulties in accumulating sufficient financial resources to place as down payment. Moreover, BOV has recently entered into an agreement with the Housing Authority. Through the New Hope Guarantee Scheme, BOV is reaching out to those customer segments that, up to today, were unable to obtain a life cover for their home loan precluding them from being able to finance their dream home.

Last year, Bank of Valletta also became the first local financial institution to offer its customers a holistic digital journey when applying for a home loan. While customers may still opt to visit a branch at any point during their home loan application process, the new Online Home Loans Solution has become accessible through a revamped landing page on the corporate site https://homeloan.bov.com/. This enables users to assess the level of financing they can apply for to finance the acquisition of their home, and equally, to start and finish off their home loan application from the comfort of their home.

BOV has maintained its interest rates on home loans unchanged for the time being, despite the rate hikes which the European Central Bank has been implementing for the past months. BOV continues to monitor its cost of funding closely, and to date has not experienced any material changes which would warrant a change to its home loan pricing. BOV has access to a large pool of deposits which fund its business. The economic growth experienced by Malta enabled the accumulation of financial wealth and the bulk continuing to be channelled into deposits. Clients continue to entrust their savings with BOV in view of the wide range of financial services which can be offered by a fully-fledged institution.

BOV is aware that as Malta’s largest bank, its performance is shaped by the country’s economic prospects, but its actions are also key to support economy. This places the Bank in a special position which allows it to view aspects holistically. BOV believes that at the current juncture, the stable risk profile of its mortgage loans and the ample liquidity, do not warrant any changes in the home loan product prices and related terms and conditions. This is seen as a win-win strategy for the Bank, its customers, and the Maltese economy.