Maltese property prices have been rising for the past 6 quarters, after a short slump in late 2012. Malta’s house price index rose by 7.58% (6.85% inflation-adjusted) during the year to Q3 2014, based on Central Bank of Malta (CBM) figures. Property prices rose by 1.30% (0.46% inflation-adjusted) during the third quarter of Q3 2014.
Most property types experienced price hikes:

• Apartments had a 7.17% price increase during the year to Q3 2014. Prices actually went up by 6.44%, when adjusted to inflation.
• Terraced houses rose by 5.89% (5.18% inflation-adjusted) y-o-y in Q3 2014.
• Maisonettes, on the other hand, had a slight price drop of 0.42% (-1.09% inflation-adjusted) y-o-y in Q3 2014.
• “Other houses”, consisting of townhouses, houses of character and villas, experienced the highest price increase of 16.17% (15.38% inflation-adjusted) during the year to Q3 2014.

Rising house prices are partially attributable to the Individual Investor Programme, introduced in the government’s budget of November 2013, which targets high net worth individuals.  In addition, the stamp duty exemption for first-time buyers on the first €150,000 of their new property’s value has been extended till June 30, 2015 for all contracts for sale made on or before that date.

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)

However, property prices started to fall in 2008 due to the global financial meltdown. The house price index dropped by 4.3% (-9% inflation-adjusted) in 2008, 1.4% (-1.1% inflation-adjusted) in 2009 and another 2% (-4.4% inflation-adjusted) in 2010. After a short-lived recovery in 2011, house prices fell again by 2.2% (-5% inflation-adjusted) in 2012.

Confidence is still shaky.  Construction firms’ confidence fell slightly from -19 in June to -21 in September 2014, though it remained above the long-term average of -31, according to the CBM.  In 2013, the total number of new dwelling permits rose by 4.8% to 1,004 permits, but the actual number of dwelling units permitted fell by 11.7%, because fewer apartment unit permits were applied for.

Malta’s economy is expected to expand 3.5% in 2015, from 3.2% in 2014, according to Finance Minister Scicluna. During the 3rd quarter of 2014, the economy rose by 3.8% in real terms, much faster than the euro area’s y-o-y economic growth of 0.8%.

There are many restrictions on property ownership in Malta. Foreign nationals and EU citizens can only buy one property in Malta, and usually only for owner-occupancy. But 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, it has a swimming pool, and it is registered with the Hotel and Catering Establishments Board. Foreign-owned properties can only be rented out for short-term lease agreements.

The housing boom

Malta’s housing boom was brief but sweet, lasting from 2002 to 2005. It 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 which was effective from 2001 to 2005. This allowed income on previously hidden overseas assets to become legal, with no questions asked, if they were declared and brought back to Malta. Many residents took advantage of the scheme, often using their repatriated assets to buy property in Malta. Lastly, property development was encouraged by the abolition of building height requirements in some areas by the Malta Environment Planning Authority (MEPA).

The house price rises continued at a gentle pace from 2005 to 2007. Then like other European countries, the global recession hit Malta in 2009. Malta is an export-oriented country and is dependent on foreign trade and tourism, and Malta’s economy experienced a 2.13% contraction in 2009.

Low interest rates are encouraging borrowers

The lending rate on new mortgages was 2.86% in October 2014. Housing lending rates have hovered near the 3% mark since December 2008. Before Malta joined the Euro in January 2008, Malta's mortgage borrowing rates ranged from 4% to 5% (and above).

Unsurprisingly, borrowing to buy houses has risen in recent years, from around 18.9% of GDP in 2002, to 45.5% of GDP in 2013, according to the European Mortgage Federation (EMF), and by another 8.13% to €3.51 billion, during the year to October 2014.

Rental yields are low

Rental yields in Malta are quite low. Malta’s apartments have gross rental yields ranging from 3.26% to 4.44%, about the same level as the previous year, according to Global Property Guide research of March 2014.

Larger apartments (250 sq. m. apartments), which are priced at around €2,937 per sq. m., have lower yields. Smaller apartments (75 sq. m. and 120 sq. m. apartments) are cheaper (especially 120 sq. m. apartments) at around €2,000 to €2,600 per sq. m., and have higher yields.

Maltese, in general, prefer to own property rather than rent. Malta’s owner occupancy rate was at around 80.3% in 2013, up from 68% in 1995, according to the EMF.

Of Malta's 152,770 primary dwelling units in 2013, 23.55% were rented, down from 28.3% in 1995. Around 71.18% of the total rental housing stock is private sector, 26.24% government-owned or council housing, and 2.58% belongs to the Maltese church.

New dwelling permits are stagnant

Development permits for new dwellings, irrespective of the number of units, rose to 1,004 in 2013, a 4.8% climb from the previous year. However, it was still down by 61.91% from 2007’s peak of 2,636. According to the Central Bank of Malta, housing investment continued to fall in Q3 2014. Confidence among construction firms slightly deteriorated as the relevant index dropped from -19 in June to -21 in September.

In terms of the number of units, the dwelling permissions granted fell by 359 units or 11.7% to 2,705 in 2013, continuing the declining trend after the 2007 peak of 11,343. The decline was mainly attributed to the drop in the largest residential category, apartments, accounting for more than three-fourths of the total permits issued. Permits for apartments fell by 427 or 17.2% in 2013. In contrast, permissions granted for other property types had an aggregate increase of 68% during the same year, according to the Malta Environment and Planning Authority (MEPA).

The house price declines during the recession were moderate, not catastrophic, peaking at 9.85% over the year to Q1 2009. They were partly caused by overbuilding. In order to reduce the need for social housing, the government had devised a program in the 1980s to give middle class working Maltese access to loans to purchase homes. This subsidized financing encouraged construction and by 2005, development permits for dwellings had increased to 1,850, and rose to an average of 2,500 permits in 2006 and 2007, from an average of 1,300 between 2000 and 2004.

In 2008, around 6,836 new dwelling permissions were granted, a 40% decline from the previous year – but still about 4,000 permits above the annual new dwelling demand, estimated at 1,800 – 2,000 units per annum by the MEPA in its 2008 “The Environment Report”.

More alarming was the high residential vacancy rate. In 2005, 27.6% of the total dwelling stock was vacant (53,136 units) of  which 22.4% was permanently vacant. The number of permanently vacant dwellings had grown by 89% (or 20,352 units) between 1995 and 2005. 5.2% of all dwellings were classified as secondary homes.

As of 2013, the residential vacancy rate was 18.4% of the total dwelling stock (41,282 units). Around 13.3% of all dwellings were considered secondary homes, according to the European Mortgage Federation’s (EMF) Hypostat 2014 report.

Malta: one of eurozone's better-performing economies

The Maltese economy accelerated further in 2013, expanding by 2.4% y-o-y, after a meagre 0.6% annual GDP growth due to the eurozone debt crisis in 2012.

The Maltese economy expanded by 3.5% annually from 2005 to 2008. After contracting by 2.6% in 2009 due to the global crisis, the economy bounced back strongly with real GDP growth rate of 2.9% in 2010 and another 1.7% in 2011.

By the end of 2014, the economy is expected to expand by around 3.2%, according to Finance Minister Edward Scicluna's 2015 Budget speech of November 2014. GDP is expected to grow by 3.5% in 2015. Growth is predicted to continue in 2016 and 2017 with 3.4% and 2.9% growth rates, respectively.

The government has been committed to bring down its deficit to below 3% in 2013. For 2 consecutive years this has been achieved, and the deficit is expected to fall further in 2015. The country’s fiscal deficit was reduced in 2013 to around 2.7% of GDP from 3.7% in 2012. By end of 2014, Malta’s deficit to GDP is down to 2.1% and is expected to decline further to 1.6% in 2015, according to Finance Minister Scicluna.

These improvements are backed by Malta's resilient labour market. In 2014, employment grew by around 2.1%, with unemployment of around 6%. Malta’s unemployment was 5.9 % in Q2 2014, much lower than European Union’s 10.3% and Euro Area’s 11.6% unemployment rates.

Inflation was 0.6% in November 2014, up from 0.3% a year earlier.