The impact of interest rates on property prices : a case study on Malta

Abstract

This dissertation investigates the relationship between interest rates and property prices in Malta, particularly between 2009 Q1 – 2025 Q1, where the real-estate market has experienced a boom in valuations and interest rates plunged downwards following the Global Financial Crisis. The Maltese residential property market is characterised by a high homeownership rate and modest costs of borrowing, funded mostly by consumer deposits. This when compared to Malta’s European counterparts, makes the interest rate market relatively independent from the European Central Bank’s stances on monetary policy. Hence, we regress the cost of borrowing for households to purchase a home against Malta’s Residential Property Price Index to truly capture the effects of financing costs through an Autoregressive Distributed Lag (ARDL) model. The ARDL is employed to examine the long and short-run dynamics between property prices and interest rates, along with the speed of adjustment. The short-run findings are found to be statistically weak and the speed of adjustment is slow, highlighting a delayed transmission in the market. A cointegrating long-run relationship is found between our variables where the cost of borrowing exerts minor downwards pressure on the prices of property but found to be borderline statistically insignificant. The conclusions of this study aim to contribute to the existing literature on the Maltese housing market, an important subject given the central role played by real-estate in terms of social welfare and economy-wide stability. This makes it relevant to policymakers, financial institutions, investors and all stakeholders alike.