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Title: Property price misalignment with fundamentals in Malta
Authors: Micallef, Brian
Keywords: Housing -- Prices -- Malta
Housing -- Valuation -- Malta
Housing forecasting -- Malta
Housing -- Prices -- Statistics
Issue Date: 2016
Publisher: Central Bank of Malta
Citation: Micallef, B. (2016). Property price misalignment with fundamentals in Malta. Central Bank of Malta WP/03/2016.
Abstract: This paper computes an aggregate ‘misalignment’ index using a multiple indicator approach to identify under or over-valuation of house prices in Malta based on fundamentals. A total of 5 indicators are used that capture demand, supply and banking system factors: the house price-to-RPI ratio, the price-to-income ratio, price-to-construction costs ratio, dwelling investment-to-GDP ratio and the loan-to-income ratio. These indicators enter the index in ‘gap’ form, that is, as a deviation from their trends or long-run averages. The weights are derived using principal component analysis. Based on the Central Bank of Malta house price index, the misalignment indicator shows a period of overvaluation in house prices that peaked in 2006-2007. This disequilibrium started to be corrected following the decline in house prices, reaching a trough in 2013. Starting in 2014, however, the index started to recover such that, by end-2015, house prices were broadly in equilibrium.
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