Page 10 - Housing & Poverty In Malta With A Focus On The Southern Harbour Region

The faltering of Keynesian economics and the failure to attain full employment, was
succeeded by privatisation and liberalisation policies. Deregulation expanded the scope
for the capital and money markets, which enabled the provision of long-term consumer
credits on a vast scale. Simultaneously, this accelerated the phenomenon of land and
property integration into the capital market.

“The integration of the land and property market into the capital and money market accelerates the
instability of the land and property markets, which in turn gives rise to negative equity, mortgage
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arrears, possessions and financial failures.”

Property and land prices have already fallen dramatically in the beginning of the 1990’s
in a host of European countries including England, before they soared again in the late
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1990’s .
In an in-depth local study covering 1980 to 1994 and relating to the multi-faceted Maltese
housing market, Demarco (1995) found that housing prices did respond to government
measures and policies. Such policies, locally, included rent control legislation and
subsidised interest rates, with the local scenario being characterised by a lack of
alternative investment opportunities. Since at the time of the commissioning of the study,
no official data on housing market prices were published, the author resorted to price
data compiled from asking prices as advertised in a leading local newspaper and
supplemented by data on prices of residential property published by the Ministry of
Finance. According to Demarco, the data thus collected at least give reliable information
on price movements. To-date, no better indicator of housing price movements exists and
the indicator pioneered by Mr. Demarco, despite not being the most ideal measure to go
by, is published in the Central Bank of Malta’s Annual Report.

Due to the introduction of a Capital Gains Tax in 1993, there is the possibility of under-
reporting of declared sales values, which could prove to be an insurmountable statistical
challenge biasing figures for 1993 and 1994. However, some inferences, bearing in mind
this pitfall have been attempted by Demarco (1995).

From: The Asking Price Of: Rose By:
1980 to 1994 Flats 186%
1980 to 1994 Terraced Houses 193%
1980 to 1994 Property Sold To Foreigners 200%

Since 1983, the rate of increase in house prices was substantially higher than the
inflationary rate yielded by the Retail Price Index (RPI).

Real estate prices do not feature in the RPI. However, apart from possibly being a leading
indicator of RPI inflation, since rising asset prices, as mentioned above, may encourage

13 Ibid. p. 106.
th
14 “Castles in hot air” The Economist (May 29 , 2003).

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