MALTA (Commonwealth Union)_ The first half of 2022 saw a considerable increase in inflation throughout most global economies, leading in price hikes for different products and services. Malta was not immune to such inflationary pressures, with consumer prices rising from an annual rate of 0.7 percent last year to 6.8 percent in July 2021. The industrial producer price index, which assesses the evolution of transaction prices from the producer’s perspective, rose even more for items traded on the domestic market. The index increased by 9.2 percent in June 2022 compared to June 2021.
Inflationary pressures on the construction business include increased charges for building supplies and higher prices for machinery. The industry was also confronted with greater compliance costs in order to comply with recently established construction requirements.
While similar issues are common in other economic sectors, construction operators confront the additional obstacle of needing to factor in price movements several months in advance, because most construction work is project-based, and prices are normally agreed upon prior to the start of work. This is also true to some extent for residential houses, as many are sold on plan.
Indeed, in discussions with KPMG, top developers voiced concern that in the present environment, operators who sold on plan may struggle to complete projects within the initial cost budget.
In a recent interview, Michael Stivala, President of the Malta Developers Association (MDA), stated that the cost of construction has risen by 30 to 40%, amounting to an average of €10,000 to €15,000 per apartment. The MDA commissioned KPMG to compile the Construction Industry and Property Market Report 2022, which estimated the price of a median apartment in 2021 at €249,000. Taking into account the reported increase in building costs, asking property prices would rise by 4.0 to 6.0 percent – disregarding other potential increases in the cost of land, marketing, and estate agency fees. However, it remains to be seen whether such charges would be met entirely by buyers or whether a portion of the cost rise will be borne by the seller.
On the other end of the spectrum, rising home prices and overall inflation are affecting buyer affordability. The Housing Affordability Index (HAI) is calculated by KPMG as part of the Construction Industry and Property Market Report. The HAI was calculated at 76.4 percent, which means that a household earning the median income could only borrow 76.4 percent of the money needed to buy a median-priced apartment.
An HAI of 100 percent, for example, suggests that a household with a median income would be able to borrow the exact amount needed to purchase a median-priced property. If developers passed on the full rise in construction costs to buyers, the HAI would fall from 76.4 percent in 2021 to between 72.0 and 73.4 percent, unless family incomes increased by a proportionate amount or banks relaxed their lending conditions.
With inflation on the rise, the European Central Bank (ECB) is expected to hike interest rates further in the coming months in an effort to keep inflation under control. The ECB reversed the trend of negative interest rates in July 2022, raising the ECB rate from -0.5 percent to 0.0 percent. Analysts predict that this will climb to 1.25 percent within the next 18 months. Such an increase would almost certainly result in higher interest rates at local banks, raising borrowing costs for both developers and buyers. Such a step would raise developers’ expenses and reduce consumer affordability by increasing monthly loan repayments and, as a result, lowering the amount buyers could borrow.
