Disaggregating the analysis of the housing market for a small island state : the case of Malta

Abstract

This study examines the usefulness of disaggregating the analysis of the housing market for a small island. This premise is studied using two approaches. Firstly, a median house price index was created for each region in Malta, where the movement of this index was compared to the country-wide index. This was disaggregated into selected locations (Marsascala, Mosta, Sliema, St. Paul’s Bay and Swieqi were chosen for the purposes of this study), where markedly different trends to the country-wide index where noted. The second approach was to compare the price movement of these locations with macroeconomic fundamentals, by the creation of a composite indicator, with the weightings of each sub-indicator being derived by principal component analysis. This type of analysis has been done at a country-wide level (Micallef, 2016), but no such literature exists on such a disaggregated level for Malta.

The results of this study show that there are in fact differences in how median prices move between different regions as well as different locations. Furthermore, despite having the same underlying fundamentals the localities’ markets appear to be in different stages of their housing cycle. Sliema reported the highest misalignment index, whilst St. Paul’s Bay lagged the most behind and remained relatively undervalued as of the third quarter of 2016. Despite these differences, one common trend in all locations was that the movement of the index over the past few quarters was reminiscent of the cycle in the early 2000s – indicating a risky upward trend in all markets. This study is useful as it supports the argument that housing analysis should be on a disaggregated basis even for small countries such as Malta. It also provides another possible stratum on which to calculate the country-wide index, as well as highlighting which locations in Malta carry the highest risk of over-valuation.