Euro adoption process fuelled property bubble

The document notes that the property boom coincided with the inflow of capital from abroad upon the repatriation of Maltese resident’s savings abroad during the process of Euro adoption.

According to the report, the process towards Euro adoption described as a “one-time phenomenon” explains the continued increase in house prices observed in the latter years of the property boom. 

This boom in prices “raised unrealistic expectations of future capital gains.”  It also led to the “correction” of property prices in 2009 and 2010, which coincided with the global recession.

But the report fails to note the active encouragement of the building boom through a relaxation in building heights in 2005, which opened the floodgates for development in the village and town cores.

Moreover – according to the pre-budget document – the fall in property prices in 2009 and the subsequent decline in investment in property prices suggests that “investors have reassessed their expectations of long-term capital gains towards more realistic and sustainable levels.”

The report warned that excessive housing construction results in a shift in investment from other sectors of the economy, contributing to a slowdown in these sectors, while triggering a spiral of foreclosures and bankruptcies.

Economist Edward Scicluna was the first to establish the link between property glut and the adoption of the euro in comments to this newspaper in October 2005.

On that occasion, he warned that as the date for the euro changeover approached, more people were channelling their undeclared monies into legitimate activities like property development.

“These monies are now fuelling the current inflationary pressures, further exacerbating the property bubble and encouraging property speculation, with its needless environmental damage and destruction of our towns and village cores, and leading to downward pressures on the Maltese Lira.”

The number of housing units constructed increased by 35% in 2005, from 6,700 to 9,000, and despite the increase, prices skyrocketed by 40% since 2003 for apartments, and by 35% for two-bedroom maisonettes.

But in 2009, both prices and the number of new dwellings started to fall.

The number of new houses approved by the Malta Environment and Planning Authority nose-dived from a record high of 11,343 in 2007 to just 4,444 last year. This represented a sharp – 61% – decrease in the number of approved new dwellings since 2007.