The impact of rising inflation on the Maltese property market

Rising prices

The first half of 2022 has been marked by significant growth in inflation in most global economies, driving up the prices of various goods and services. Malta has not been immune to such inflationary pressures and has seen consumer prices fall from an average annual rate of 0.7% last year to an annual rate of 6.8% in July 2022 .

The industrial producer price index, which measures changes in transaction prices from the producer’s perspective, increased further for goods traded domestically. In June 2022, the index increased by 9.2% compared to June 2021.

Rising construction costs

For operators in the construction industry, rising inflation translates into higher charges for building materials and higher prices for machinery. The industry has also faced higher compliance costs to align with recently introduced building regulations.

Although these challenges are common to other economic sectors, construction operators face the additional difficulty of having to account for these price movements several months in advance, given that most construction work is based on projects and that prices are generally agreed upon before work begins.

To some extent, this is also true for residential properties, as a number are being sold off-plan. In fact, in discussions with KPMG, leading developers expressed the view that operators selling off-plan may find it difficult to complete projects within the original budget in the current environment.

Construction cost increased by 30-40%

The impact on the price of apartments

In a recent interview, Michael Stivala, President of the Malta Developers Association (MDA), reportedly said that the cost of construction has increased by 30-40%, which averages out to €10,000-15,000 per apartment.

The 2022 Construction Industry and Real Estate Market Report, prepared by KPMG and commissioned by the MDA, estimated the median price of an apartment in 2021 at €249,000. Factoring in the cited increase in construction costs would result in an increase in the asking prices of real estate of between four and six percent – excluding other potential increases in the cost of land, marketing and real estate agency fees. However, it remains to be seen whether these costs would be entirely borne by the buyers or if part of the cost increase would be absorbed by the seller.

A decline in buyer affordability

On the other side of the spectrum, rising house prices and general inflation are impacting affordability for buyers.

KPMG calculates the Housing Affordability Index (HAI), also as part of the report on the construction industry and the housing market.

The HAI was calculated at 76.4%, meaning that a household earning the median income could only borrow 76.4% of the financing needed to purchase an apartment at the median price. For reference, an EAT of 100% indicates that a household with a median income would be able to borrow the exact amount needed to purchase a property at the median price.

If developers passed the entire increase in construction costs on to buyers, the ICH would fall from 76.4% in 2021 to 72 and 73.4%, unless household incomes increase by one. corresponding amount or that the banks relax their lending criteria.

Rising interest rates

With inflation rising rapidly, the European Central Bank is expected to raise interest rates further in the coming months, in an effort to contain inflation.

In July 2022, the ECB reversed the trend of negative interest rates and increased the ECB rate from -0.5% to 0.0%. Industry analysts expect that figure to rise to 1.25% in about 18 months. Such an increase would most likely lead to increases in local bank interest rates, thereby increasing borrowing costs for both developers and buyers. Such a move would further increase developer costs and reduce buyer affordability, by increasing monthly loan repayments and, therefore, decreasing the amount buyers could borrow.

The impact of rising inflation on Malta’s property market will be one of the topics discussed at the upcoming conference, The Future of Malta’s Property Market, organized by KPMG with the support of Property Malta, to be held on October 28. For tickets and more information, visit https://kpmglearningmalta.com/courses/the-future-of-maltas-property-market/ or contact +356 9946 7927.

For more information on KPMG’s advisory services, contact Steve Stivala, Associate Director, Advisory at [email protected] com.mt or David Pace, Partner, Head of Consulting at [email protected]

Steve Stivala is Associate Director and Melissa Grima is Senior Manager, Advisory, KPMG in Malta.

Independent journalism costs money. Support Times of Malta for the price of a coffee.

Support us