Page 11 - Housing & Poverty In Malta With A Focus On The Southern Harbour Region

consumers to splurge, also affect inflation. Indeed, the RPI is a flawed measure of
inflation.

“Ideally, an effective measure should include not only the prices of goods and services consumed
today, but also of those to be consumed tomorrow, since they, too, affect the value of money. Assets
are claims on future services, so assets are a proxy for the prices of future consumption.”
15

The RPI seems to have underestimated true inflation repeatedly in the past, and this
inevitably adversely affects housing affordability. What is more, it also adversely affected
landlords renting property under the rent laws’ restrictions, since the allowable increases
were RPI-based (Mallia, 2003).

What is more, the price level of both houses and flats was consistently higher in the
Sliema/ St. Julian’s area, with the difference widening progressively with time. The
difference in prices of terraced houses over space narrowed slightly between 1980 and
1993, but widened again thereafter.

In 1990, the price of a flat in the Sliema/ St. Julian’s area was estimated to be 50% the
price of a terraced house, whereas that for a flat in the Southern Area was estimated at
40%. The Sliema/ St. Julian’s area was also found to be strongly preferred by foreign
buyers, who perhaps end up crowding out the lower-earning Maltese workers.

House prices also rose in absolute terms and in relation to incomes. According to Demarco
(1995), this is due to the fact that in 1987 a wage freeze which was then in force was
abolished, with the result that unemployment declined and incomes rose. These factors,
in turn, paved the way for an unrelenting rise in house pricing. A very sharp rise was
registered in 1994. We found such an analysis to be very suspect though, since the
abolition of the wage freeze should, in theory, have resulted in increased unemployment
levels. To the contrary of Mr. Demarco, we believe that the fall in unemployment, the rise
in the general level of wages and, by implication, the soaring house prices lie in
institutional factors that reinvigorated the Maltese economy and that fuelled a wave of
speculation that will only last when such speculation can no longer be sustained by real
economic activity and the market will have no option but to correct itself. In other words,
while agreeing with Demarco’s analysis of effects, we disagree with his causal analysis.

By the end of 1994, flats siphoned off 370% of average disposable income, which means
that the average Maltese worker had to work for 3.7 years and allocate all his earnings to
paying off his loan in order to pay back a housing loan. Terraced houses siphoned off 810%
of average disposable income, which by the same token, translates into an individual
working for 8.1 years exclusively for the house loan needed to finance the purchasing of
the house.

The key factors affecting the Maltese housing market (Demarco, 1995) are:

rd
15 “Hubble, bubble, asset-price trouble” : The Economist (Sep 23 1999).

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