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George Mangion
Provided banks generate record profits their shareholders bless this folly as a path leading to unbridled prosperity
Last month, the International Monetary Fund sent shudders through financial markets warning that America’s sub-prime mortgage crisis could deepen and contagion spreads to other countries. This warning came hot on the heels of last week’s sudden dip in Spanish property sector. Spain’s overpriced property shares came crashing down last week with panic selling in the real estate sector signalling the end of a 10-year-old construction boom.
Critics report that the Spanish real estate sector is not a bubble, it is a huge balloon. When it blows up there will be an enormous bang,” said one Madrid trader. Some exclaim that property is 35% overvalued. In truth ,the mortgage market stalled and house price growth slowed significantly, suggesting the market was heading for a soft landing. Quoting Datamonitor’s report it appears that the rot is spreading in Europe. It warned that given the current situation of high personal indebtedness, the UK sub-prime sector also poses more risk than before.
A similar correction in the Dublin area is currently worrying property investors. At a domestic level some warn about the threat of a boom and bust cycle in the housing market .This omen persists even though banks report higher lending exposures to developers and major building contractors. Consistent strong performance in this sector since independence has yielded almost double-digit house price inflation.
The House Price Index of the Central Bank of Malta indicates that between 1987 and 2004, average property prices increased by 10.3 per cent, offering an average return of 7.8 per cent per annum. This vastly outstrips GDP growth over the same period.
It is an undisputed fact that prices have gone up steeply over the last years, and property is much more expensive now compared to the average salary.
Massive projects are planned , such as the second phase of Midi complex at Tignè & Portomaso. Add to this the units at Manoel Island, Time Square in Sliema,the high rise towers at Pender Gardens; the ex-Mistra Village, more towers at the former Mamo Garage complex, not to omit permits to pull down Les Lapins,Mgarr and Jerma hotels to be replaced by condominiums.
The list is endless. In the next three years all these will be completed and agents had better start in earnest to woo foreign buyers-big time.Yet,none fear a future housing crash. Speculators are bullish, pontificating that Malta enjoyed three decades of unbridled housing activity. Observers say that higher-than-expected house price inflation, is driven by a combination of factors - such as improved salaries and enhanced income from the black economy , encouraged by the availability of public land conceded at a discount to hoteliers but later pulled down and converted into luxury residences.
Nothing can stop the momentum of this environment killing machine . But some projects stand out from the grey concrete jungle. One such example is Fort Cambridge development which is planned to be erected on the ex-Holiday Inn site. The owners won the tender for the land at a recent privatisation paying a cool sum of Lm23.4 million. This was partly financed by an issue of Lm16 million in local bonds which were over subscribed in a few hours. Owners sold 150 units on plan within a week of placing an advert . This is almost half of the 340 apartments which are targeted for completion in three years time.
Why is there such a zest by investors to prefer brick and mortar projects ruining our environment and clogging the streets with excavators and dust. Perhaps it is because the opportunities for conventional equity investment on the local stock exchange are non-existent. Could it be that there exists a strong predilection by Maltese towards home ownership.
Another phenomenon is that traditions are changing .It seems that more people now prefer to borrow beyond their means just to live in a modern flat with a view and savvy amenities rather than in a traditional old town house with a small backyard. All this contributed to the proliferation of a cacophony of concrete structures of dubious architectural value. Can it be sustained in the long-term. Not likely, yet who is complaining?
Provided banks generate record profits their shareholders bless this folly as a path leading to unbridled prosperity. In some ways it is a mystery that when the economy is growing at a slower pace of under 3% property prices are skyrocketing at an unprecedented dizzy rate. It was HSBC that way back in 1999 launched the Equity Release Loan, a packaged product combining attractive interest rates with long term borrowing. Customers may borrow up to 80 per cent of the value of the property.
Banks were the first to capitalise on this so called hidden equity.They swiftly devised exciting products to unlock this wealth, enabling the incumbent owners to borrow on the excess and spend the proceeds on practically anything they fancy.This has fanned the fire for easy credit linked with favourable repayment terms of up to 20 years.
Many were lured to mortgage their property to acquire otherwise unaffordable luxury cars, a second seaside summer flat or even a mountain view chalet in Bulgaria.
But increases in personal debt exacerbated with increments in the Central Bank base rate could spell trouble. Evil tongues say that due to prolific Mepa permits there is undoubtedly an over supply. But who has the temerity to be a prophet of doom and whisper that the property bubble is heading to burst ?
There is too much at stake;-jobs, credit institutions, debt levels and untold misery. The sustained pace of erecting houses by the thousands is bolstered by vast hoards of repatriated cash spurred by repeated offers by government of tax amnesties. Quoting Godfrey Swain a senior HSBC official ,he said total home loans on the market amounted to Lm780 million and that 54 per cent of HSBC’s loan book was taken up by home loans. While banks are required to practise a responsible lending policy, there is a vow to shareholders to maintain record annual profits. Only the future can tell if this marathon is sustainable, in the meantime, European shares were weighed down by Spain’s blue-chip index as the country’s property stocks took a tumble after worries over its financial strength.In many regions, house prices in Spain are falling.
Quoting Datamonitor, the Spanish minister said there was now oversupply, with licences issued for 800,000 new housing starts compared with an estimated demand for 600,000. Builders say there has been a rush to apply for construction licences ahead of stringent new environmental standards that come into force this year and that this has added to the glut of unsold property.
Back to Malta,perhaps a practical solution is to reform the rent laws and encourage more tenants to rent from a growing inventory of vacant premises. For a number of families, the possibility of renting propety may be the only affordable tenure option given the high prices. More funds should be funnelled through the Housing Authority schemes to continue offering a decent subsidy on the rent paid.
It is exemplary of the Housing Authority to try to make modern apartments affordable for young couples to rent. Some may criticise this as a social service which we can’t afford. Yet this be an antidote to calm the fears of the property bubble bursting when supply outstrips demand.
Nobody seems to know the right solution. Certainly ,the big question seems to be, and remains unanwered: is there an over-supply of properties? Is the urge and greed of property speculation rendering the older property stock unsaleable? Are over valued properties cocooned in a sanitised wrapper oblivious to market forces?
Another factor is the euphoria by tax evaders during the currency change- over when the excess cash in circulation may end up stoking the escalation in prices. Estate agents do not believe the housing market is over heating. They are confident that the economy shows signs of a recovery and more foreign buyers will be attracted once we join the Eurozone.
We may soon start attracting investors from oil-rich Dubai and Gulf Arab states. Lets all hope that we ride the storm and learn from the mistakes of the recent crash in the Spanish market. |
