An assessment of the Maltese housing market

Abstract

Few macroeconomic variables generate as much interest and debate as house prices. Households, firms and policymakers alike watch house prices closely because of the far-reaching implications they have on macroeconomic performance and the stability of the financial system. In recent years, house prices in Malta have risen considerably, nearly doubling between 2000 and 2015, although with a significant degree of variability. This has led to growing concerns about the possible existence of a housing bubble. This note provides an assessment of the Maltese housing market, in particular by addressing four key points of interest. First, we outline the main developments in the housing market in recent decades and discuss the various demand and supply factors, including Government policies, that have shaped the course of house prices. Next, using both statistical and econometric techniques, we examine whether there is any misalignment in house prices and find that as at the end of 2015, house prices were not overvalued. Third, we identify trends in housing rents using data which has been made available only recently. We show that the increase in rents over the past decade has matched the rise in house prices, which further reinforces the evidence that house prices are not overvalued, but rather in line with fundamentals. Finally, simulations are conducted using STREAM, the Bank’s core macro-econometric model, to quantify the macroeconomic impact of a change in house prices and identify the main channels through which such a change is transmitted to the broader economy. The results suggest that a house price shock influences the wider economy via three main channels – private consumption, housing investment and credit – and that its macroeconomic impact is limited, but this comes with important caveats.