This article explores the impact of rising inflation on property prices, a potential increase in mortgage interest rates, and their effect on housing affordability.
by Steve Stivala, Director, Advisory Services, KPMG Malta; and Melissa Grima, Senior Manager, Advisory Services, KPMG Malta
During 2022, inflation increased significantly across most world economies, resulting in increases in the price of various goods and services. Malta was not immune to such inflationary pressures and saw consumer prices jump from an average annual rate of 0.7 percent last year, to an annual rate of 7.4 percent in October 2022.
The industrial producer price index, which measures the development of transaction prices from the point of view of the producer, increased even further for goods traded on the domestic market. In October 2022, the index increased by 8.7 percent over October 2021.
The rise in building costs
For operators in the construction industry, the increase in inflation means higher charges for building materials and higher prices for machinery. The industry was also faced with higher costs of compliance to align with recently introduced building regulations.
While these challenges are common to other economic sectors, construction operators are faced with the added difficulty of having to factor in these price movements several months in advance, since most construction work is project-based, and prices are generally agreed upon prior to the commencement of works. To an extent, this is also true for residential properties, since a number are sold on plan. In fact, in discussions with KPMG, leading developers 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.
” The Construction Industry and Property Market Report 2022, prepared by KPMG and commissioned by the MDA, estimated that the price of a median apartment increased from €249,000 in 2021 to €279,500 in 2022 “
The impact on the price of apartments
During an interview earlier on in the year, Michael Stivala, President of the Malta Developers Association (MDA), was quoted as saying that the cost to build has increased by 30 to 40 percent, which amounts to an average of €10,000 to €15,000 per apartment. The Construction Industry and Property Market Report 2022, prepared by KPMG and commissioned by the MDA, estimated that the price of a median apartment increased from €249,000 in 2021 to €279,500 in 2022. This means that between 30 and 50 percent of the increase in property prices in the past year would be expected to be absorbed by the rise in building costs.
A decrease in buyer affordability
On the other side of the spectrum, the increase in property prices, and inflation overall, is impacting buyer affordability. KPMG computes the Housing Affordability Index (HAI), also as part of the Construction Industry and Property Market Report.
During 2022, the HAI decreased from 89.6 percent to 83.6 percent, meaning that in 2022 a household earning the median income would only be able to borrow 83.6 percent of the financing required to purchase a median-priced apartment.
For reference, an HAI of 100 percent indicates that a household with median income would be able to borrow the exact amount required to purchase a median priced property.
Any increase in property prices translates into a decrease in housing affordability, unless household incomes increase by at least a corresponding amount, or banks loosen their lending criteria.
Rising interest rates
With inflation rapidly on the rise, the European Central Bank (ECB) is expected to raise interest rates further in the coming months, in a bid to rein in inflation. In recent months, the ECB reversed the trend for negative interest rates and the ECB rate now stands at 1.5 percent, compared to -0.5 percent prior to June this year. Such an increase is likely to eventually result in increases in the local banks’ interest rates, thus increasing borrowing costs for both developers and buyers. Such a measure would further increase the developers’ costs and decrease buyer affordability, by increasing the monthly loan repayments, and in turn decreasing the amount buyers could borrow.
References:
National Statistics Office Malta – News Release 201/2022, Residential Property Transactions: October 2022; 09/11/2022;
National Statistics Office Malta – News Release 209/2022, Harmonised Index of Consumer Prices (HICP): October 2022; 17/11/20222022;
National Statistics Office Malta – News Release 219/2022, Industrial Producer Price Indices: October 2022 dated 30 November 2022.
For more information about KPMG’s Advisory services kindly contact David Pace – Partner, Head of Advisory on davidpace@kpmg.com.mt or Steve Stivala, Director, Advisory on stevestivala@kpmg.com.mt .
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