Malta: a booming economy, strong house price rises
April 27, 2017
The Maltese economy remains one of Europe's fastest growing. After amazing economic growth in 2014 and 2015 of around 7.9% annually, growth slowed to 5% in 2016.
House price rises were experienced by all property types:
- Apartments had a double digit price increase of 15.86% during the year to Q4 2016. When adjusted for inflation, prices were up by 14.99%.
- Terrace houses saw a 13.33% y-o-y (12.48 inflation-adjusted) price hike in Q4 2016.
- Maisonettes experienced the highest price surge, rising by 20.42% (19.51% inflation-adjusted) over the year to Q4 2016.
- "Other houses", consisting of townhouses, houses of character and villas, however, had a relatively low growth of around 1.96% y-o-y (1.20% inflation-adjusted) in Q4 2016.
Maltese property has been on the upswing for the past three years. These latest price rises were attributed by the central bank above all to the Individual Investor Programme (IIP) and to the stamp duty exemption for first-time buyers.
The first cause of house price rises, the Individual Investor Programme, was introduced in the government's November 2013 budget, and targets high net worth individuals.
The second cause is the exemption of first-time property buyers from a 3.5% stamp duty on the first €150,000 of a new property's value, saving first-time buyers up to €5,000 (US$ 5,315). It also applies to a promise of sale signed from July 1, 2015. Buyers who have paid after July 1, 2015 (when the scheme was originally supposed to end) are still entitled to a full stamp duty refund.
Other factors supporting housing demand were:
- The low interest rate environment, which led to higher lending for house purchases;
- Growth in disposable income; and
- The increased number of foreign workers in Malta.
Malta's 2017 budget also has provisions favourable to potential property buyers in 2017, including an extension of another year (up to December 31, 2017) of the first-time buyer stamp duty exemption, and the reduction of stamp duty on residential properties in Gozo from 5% to around 2% (applicable till the end of 2018, as long as the promise of sale agreement is registered with the Inland Revenue Department by the end of 2017).
The new budget also provides a subsidy of up to €100,000 (US$ 106,300) on expenses incurred on property restoration, to first time buyers of immovable property located within an Urban Conservation Area, or of certain scheduled properties. To simplify the tax collection process, the budget also imposed a final tax rate of 7% on the value of all inherited property transfers by means of a judicial sale by auction.
"Locally, people are worried that the property bubble might burst, but I don't believe it will. Bubbles burst when an economy relies on one source of income, but our location, lifestyle, the economy and language have provided us with diverse options," said RE/MAX Malta's managing director Kevin Buttigieg. Malta's real estate market is "very buoyant", he adds. "We're witnessing all sorts of purchases: first-time buyers, commercial investments, people securing property for their children, direct foreign investment and those buying as a result of the IIP Citizenship Scheme. Plus, the fact that people can get between a five-and-ten per cent return on rental properties means we're also seeing heavy investment in buy-to-lets."
From 2000 to 2007, the Maltese property market enjoyed strong growth, with the overall house price index rising by 78.9% (53.4% inflation-adjusted). Over the same period:
- Terraced houses saw the largest price increase of 105.3% (76% inflation-adjusted)
- Apartment prices rose by 83.3% (57.1% inflation-adjusted)
- Maisonettes prices increased by 81.4% (55.5% inflation-adjusted)
- Townhouses and villas rose by 71.9% (47.4% inflation-adjusted)
Malta's housing boom peaked in the second quarter of Q2 2004 with an amazing 36.73% y-o-y house price rise. The boom was set off by low interest rates, which had an extraordinarily strong effect, boosting residential mortgage debt from only 19.6% of GDP in 2002, to 34.6% of GDP in 2006.
A supporting factor was the Investment Registration Scheme, a tax amnesty for Maltese residents with overseas assets, effective from 2001 to 2005. The house price rises continued at a gentle pace from 2005 to 2007.
Then like other European countries Malta was hit by the global financial crisis of 2008. Malta is dependent on foreign trade and tourism, and Malta's economy experienced a 2.13% contraction in 2009.
The house price index dropped by 4.4% (-9.1% inflation-adjusted) in 2008, 1.4% (-1.1% inflation-adjusted) in 2009 and another 2% (-5% inflation-adjusted) in 2010.
After a short-lived recovery in 2011, house prices fell again by 2.2% (-5.2% inflation-adjusted) in 2012. House prices then recovered strongly in 2013, due to government's launch of new property-related measures. Strong price rises continued from 2014 to 2016.
There are many restrictions on property ownership in Malta. Foreign nationals and EU citizens can usually only buy one property in Malta, and usually only for owner-occupancy, though they can buy more properties in 'specially designated areas' such as Tigne Point, Portomaso, Cottoenra, Manoel Island, and Chambray.
Properties owned by foreigners can be rented out only if the property is valued over €233,000, has a swimming pool, and is registered with the Hotel and Catering Establishments Board. Foreign-owned properties can only be rented out for short-term lease agreements.
Rental yields seem to be rising in Malta - now around 4.4%
Rental yields in Malta are slightly higher this year than last.
Larger investment apartments in the favourite expatriate areas such as Sliema, St. Julians and Swieqi have average prices per square metre of around €3,200 to €3,500. In these areas, one can expect to earn an average rental return of around 4.4%.
Residential prices in Malta are now moving up again, according to the Central Bank of Malta.
Round trip transaction costs are rather high in Malta. See our Malta transaction costs analysis and our Malta transaction costs compared with other countries.
Taxes are moderate to high in Malta
Rental Income: Net rental income is generally taxed at progressive rates, up to 35%.
If the nonresident elected to be part of the Individual Investor Program, gross rental income will be taxed at a flat rate of 15%.
Capital Gains: There is no tax on capital gains. The Capital gains tax is a generally levied at a flat rate of 12% on the transfer value or the selling price of the property.
Inheritance: There are no inheritance taxes in Malta, but there is a transfer duty payable by the heir at 5% of the declared property value.
Residents: Resident citizens are taxed on their worldwide income at progressive rates. Resident foreigners are liable to tax only on their income sourced in Malta.
Buying costs are low to moderate in Malta
Roundtrip transaction costs ranges from 11.68% to 25.58% of property value. The buyer usually pays for the stamp duty (1% pre-paid stamp duty, and 4% remaining stamp duty). Seller paysreal estate agent commission at 1% to 5%, plus 18% VAT. The seller also pays 12% Capital Gains Tax.
Nonresidents can only sell their properties in Malta to Maltese citizens. They can only sell to other foreign nationals if they cannot find a buyer who is either a Maltese citizen or an EU citizen.
Law is pro-landlord in Malta, but courts are impossibly slow
Maltese rental market practice is pro-landlord.
Rents: Rents and rent increases can be freely negotiated, except for rental agreements entered before 1st June 1995.
Tenant Eviction: Maltese law operates extremely slowly. Hugh Peralta & Associates estimate that a contested eviction could take between 690 and 1,915 days, and the enforcement of a judgment to collect rent could take even longer.
Malta is still one of EU's fastest growing economies"The highest growth since EU accession" said Malta's National Statistics Office (NSO) of 2014 ad 2015, and growth in 2016 was not bad either at 5%. Malta's recent economic growth surpassed the European Commission's (EC) projection of 4% growth, as well as the EC's 1.9% projected growth for the European Union in 2016. In the fourth quarter of 2016, the economy expanded by 5.1% y-o-y.
The Maltese economy had expanded by 3.2% annually from 2005 to 2008, and contracting by 2.4% in 2009 due to the global crisis, the economy bounced back with real GDP growth rate of 3.5% in 2010, 1.8% in 2011, 2.8% in 2012, and 4.5% in 2013, before taking off dramatically in 2014 and 2015.
In 2017, the EC expects Malta's economy to expand by 3.7%, the third highest in the EU, after Romania and Luxembourg. According to the EC, private consumption in the country will continue its robust growth and will be supported by "favourable labour market developments".
From 2% of GDP in 2014, Malta's fiscal deficit narrowed to around 1.4% of GDP in 2015, and is expected to fall to 0.7% of GDP in 2016.
Malta's labour market reflects the country's strong pace of economic expansion and the government's efforts to raise labour market participation. In Q4 2016, Malta's employment rate rose to 66.1% from 63.9% in the same quarter last year. Malta has the third lowest unemployment rate in Europe at around 4.1%, next only to the Czech Republic and Germany, half the Euro Area's (EA19) average unemployment rate of 9.5%.
Annual inflation was at 1.2% in February 2017, down from 1.4% in January, but an increase from 1% in the same month last year, according to the NSO figures.