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What is the Impact of rising inflation on Property prices in Malta?
Inflation will affect property prices in Malta. The first half of 2022 witnessed a significant growth in inflation across most world economies; Malta was not immune to this inflation. Although government is subsidizing the cost of fuel and electricity (over one million euro daily is forked out by the public exchequer) to keep these daily costs down for businesses and the local population, other costs including building materials, shipping and services have skyrocketed.
Malta saw consumer prices jump from an average annual rate of 0.7 per cent last year to an annual rate of 6.8 per cent in July 2022. Costs from the view of local producers increased even more and was calculated in June 22 to be around 9.2 percent over the previous year
Rising Costs
The construction industry saw building costs rise for materials and machinery, this coupled with the higher costs to comply with recently introduced building regulations, means that building costs were likely to increase by a staggering 30 to 40%! What will that mean for property prices in Malta?
The Malta Developers Association estimated that the cost to build one average apartment will now increase by between 10 and 15,000 euro. These costs do not include any further increases in the cost of land, marketing and Estate Agency Fees.
It remains to be seen if these increased costs will be fully passed on to the buyer or whether at least part of them will be absorbed by the developer to keep property prices in Malta more stable.
Buyer affordability
To add to the current difficult situation, there are a substantial number of projects that were sold ‘on plan’ when the selling prices did not reflect the increased costs the developer will now incur. People in the industry expressed the view that operators who sold on plan may find it difficult to finish projects within the original cost budget in the current environment. Even costing a building project now will be difficult to calculate as nobody knows if prices will keep on rising and by how much.
The overall price of inflation coupled with an increase in the cost of property (property price index) will have a serious impact on buyer affordability and the stability of the property market in Malta.
A 2021 Property Market Report by KPMG for the Malta Developers Association put the average price of an apartment for sale in Malta to be €249,000. This means that a Maltese family with an average income, taking a bank loan, would only be able to borrow just over 75% of the amount needed to purchase this apartment. With the increase in building costs for 2022 and beyond, this percentage would go down to 72% unless all household incomes are increased substantially. This will also effect property prices in Malta.
Increase in interest rates
Another major issue for the coming years is the potential increase in borrowing rates by the lending banks. With inflation rapidly on the rise, the European Central Bank is expected to raise interest rates further in the coming months, in a bid to slow down inflation rates.
Industry analysts expect the European Central Bank which has already increased interest rates this year to increase again to 1.25 percent within the next 18 months
This increase would probably result in increases in the local banks’ interest rates. In this scenario, borrowing costs would increase for both developers and buyers, and would further decrease buyer affordability, by increasing the monthly loan repayments, and in turn decreasing the amount buyers could borrow. This could negatively affect property prices in Malta and possibly slow down the property market.
