Averting the fracas of a property bubble

Source: George M. Mangion¸ PKFMalta

As published in the Malta Independent on the 18th  November 2012

We are hearing that the property sector is suffering from the economic slowdown in Europe. The announcement by Midi – a  leading property developer of luxury apartments for its 2012 half-year results reveal a loss and directors expect this trend to continue in the second half of the year which will lead to an overall loss position for 2012. Can this be a harbinger of a property slump? Simply put there  are over 25¸000 finished  luxury units  seeking too few buyers. What contributed to the glut of unsold properties ?. No doubt the economic instability in Europe has not helped the local real estate market to handle an  inventory of unsold properties and there are rumours that developers are showing signs of uneasiness about the cost of interest to continue to service the cost of loans on prime developments which are not selling that fast. Yet¸ paradoxically real estate agents are confident that there is  no indication that prices on quality units have been trimmed down to bargain levels only that  one can see modest reductions in prices of finished apartments for first time home buyers.

In their opinion ¸it may take a while for a correction to be felt across the board but this assertion has not helped the nervousness of local banks that in the past have been forthcoming  in financing luxury mega developments secured on projected future sales of what compared to other Mediterranean resorts can be judged as being relatively high priced.  One may say there seems to be a common trend in property bubbles that have already hit the economies of Ireland ¸Portugal and Spain where banks have been over extended to the construction sector . Now sadly  in such countries you will find investors complaining that they are sitting on  negative equity. It goes without saying that in most countries you will find strong political support for the construction industry since this directly and indirectly contributes to a multiplier effect acts as a major employer . So it is not unusual for banks to give the green light to speculative property ventures at a time when the property boom is at its acme knowing that riding on the crest of a property bull market itself guaranties a good return and property taken as collateral is a  safe  bet . Certainly banks  can charge premium rates of interest on such lending. It is a win-win position ¸while the property bubble yields higher profits for all and creates a much desired good feel good factor that politicians clamour for. But the party cannot last for ever and as in a game of musical chairs when the music stops banks will face unpaid loans and have to search for more capital injections to cover their losses on inevitable “hair – cuts “. Suddenly the recession starts to erode profits then gone are the savvy days when bankers can claim extra  annual bonuses . But how relevant is this tale  of boom and bust to our local real estate market ?

The answer is given by a Commission report to the EU Council¸ which  urged the government to take measures “to ensure the robustness of the financial sector”. This is not a reprimand as our banks have strong reserves and have been reporting annual bonanzas  of profits (BOV reported a 72% increase in profits ) even during a ti