Looking at the Maltese skyline, one was hard pressed to find a view devoid of a crane. The construction industry has been the biggest industry in the country since the end of the socialist era. Indeed this made sense, a lot of pent-up demand was unleashed as the economy started to prosper and people stopped fleeing the malaise and started returning in larger and larger numbers.
But looking around today, one sees not a crane in every direction, but ten. Property construction, redevelopment, urban expansion and encroachment on ODZ areas are now happening everywhere. If you ask around, people are starting to sense that we have reached bubble proportions. But why? Why now and not ten years ago? What has changed? What’s going on? Is this normal?
To the inquisitor, a number of answers are ready supplied by eager opinionators. They are all wrong, and the real culprit escapes the blame. One popular explanation is greed. Greedy people, greedy developers, short-sighted profit-seeking, greedy politicians accepting bribes from greedy developers who only want to get rich quick. This is only half right. Yes developers are greedy, yes politicians are greedy. We are all greedy. We all want to get rich. The quicker the better. But why are we suddenly all so much greedier than before? We are not.
The other even more popular wrong answer points the accusing finger at the foreigner. I have been repeatedly told that the passport scheme specifically has resulted in an additional 10,000 rich new citizens who are buying up everything in the country. This is plain wrong as only a couple of hundred passports have been issued under citizen-for-investment scheme, besides which almost all of the newly minted citizens have availed themselves of their EU rights and moved on to where they really wanted to go in the first place.
If it’s not the passport scheme, it is other foreigners, Italians, Brexiteers, Germans, eastern Europeans and asylum seekers all moving here by the tens of thousands to grab a piece of Birkirkara while the going is good. This notion ridiculously overstates the demographic trends, which although the growth rate has increased significantly, the population has yet to breach the half million mark.
So if it isn’t speculators or foreigners or foreign speculators who is it that is to blame? The answer is to be found between the ears of a Italian man in Frankfurt. The reason for the extremely rapid rise in asset prices in Malta is the European Central Bank.
Turn the way-back machine back to 2008. The financial crisis was turning into the European debt crisis and Malta officially joined the Eurozone on January 1st. The debt crisis had been caused by earlier action by the ECB and the Fed to ‘save’ the economy from the dot-com bubble bursting almost a decade earlier. The far-too-low rate of interest in the Eurozone created massive construction booms in the PIGS countries and massive overborrowing by their governments and municipalities.
Malta was saved all this turmoil. Having the Maltese Lira, governed out of Valletta we played no part in the mania. The currency was pegged to the Euro to be sure, but interest rates kept pace with inflation reasonably well. But when we joined the Euro and suddenly interest rates collapsed at Frankfurt’s direction, trouble started brewing. And this is crucial - bubbles take time to form. Our property bubble didn’t materialise on joining the Euro on January 1st 2008. Ten years of negative real interest rates later, and now Malta resembles the 2008 Costa Brava.
The ECB would scoff at this. They would point out, rightly, that I do not have an economics degree, and that they, the experts, know best and have everything in hand. This would continue their remarkable streak of getting everything wrong all the time. The current ECB interest rate is at 0%, which makes the official real interest rate in Malta somewhere close to -2%. This insane interest rate alone is enough to fuel a speculative mania. However, the real interest rate is much much higher.
The official inflation rate of less than 2% is bullshit. The ECB is constantly reworking the formula, adding hedonic adjustments and substitutions to arrive at this absurdly low number. Indeed, at 2% inflation, Malta has seen rent prices increase at a rate of 47% in the years 2013 to 2016. That alone would blow the 2% number out of the water. So with real inflation running somewhere in the double-digits, the 0% interest rate becomes a dangerously irresponsible policy prescription.
Ah, but you say. Malta is not the only country in the Eurozone. What about the other 18 members? Well, of course you cannot compare Malta to Spain, which had a property boom go bust in 2008. Nor could you compare it to Germany, which has had much lower inflation. You could compare it very easily to the other country that joined the Euro on January 1st 2008, our sister in the sea, Cyprus. And wouldn’t know it, many Cypriots are starting to wonder if their unprecedented property boom is now a bubble. Two other countries Slovenia (joined the Euro in 2007) and Slovakia (joined 2009) are also experiencing bubble-like tendencies in their markets.
I haven’t seen this movie, so I cannot tell you how it ends. Well, not exactly, I have seen pretty much every bit of crap this director has put out and I know how it ends. The boom will bust and property prices will attempt to return to their inflation-adjusted trendline with a healthly pendulum overswing to the downside on the way. Until the ECB saves us again from a disaster of their own creation by going even easier for even longer.
At some point however, one straw is one too many and the camel’s knees buckle and collapse. Asset prices collapse and bankruptcies usher in a period of depression or the Euro is finally printed into oblivion.
Edinburgh, November 7th 2018
TLDR: The ECB is the reason why Maltese property has gone ballistic
But looking around today, one sees not a crane in every direction, but ten. Property construction, redevelopment, urban expansion and encroachment on ODZ areas are now happening everywhere. If you ask around, people are starting to sense that we have reached bubble proportions. But why? Why now and not ten years ago? What has changed? What’s going on? Is this normal?
To the inquisitor, a number of answers are ready supplied by eager opinionators. They are all wrong, and the real culprit escapes the blame. One popular explanation is greed. Greedy people, greedy developers, short-sighted profit-seeking, greedy politicians accepting bribes from greedy developers who only want to get rich quick. This is only half right. Yes developers are greedy, yes politicians are greedy. We are all greedy. We all want to get rich. The quicker the better. But why are we suddenly all so much greedier than before? We are not.
The other even more popular wrong answer points the accusing finger at the foreigner. I have been repeatedly told that the passport scheme specifically has resulted in an additional 10,000 rich new citizens who are buying up everything in the country. This is plain wrong as only a couple of hundred passports have been issued under citizen-for-investment scheme, besides which almost all of the newly minted citizens have availed themselves of their EU rights and moved on to where they really wanted to go in the first place.
If it’s not the passport scheme, it is other foreigners, Italians, Brexiteers, Germans, eastern Europeans and asylum seekers all moving here by the tens of thousands to grab a piece of Birkirkara while the going is good. This notion ridiculously overstates the demographic trends, which although the growth rate has increased significantly, the population has yet to breach the half million mark.
So if it isn’t speculators or foreigners or foreign speculators who is it that is to blame? The answer is to be found between the ears of a Italian man in Frankfurt. The reason for the extremely rapid rise in asset prices in Malta is the European Central Bank.
Turn the way-back machine back to 2008. The financial crisis was turning into the European debt crisis and Malta officially joined the Eurozone on January 1st. The debt crisis had been caused by earlier action by the ECB and the Fed to ‘save’ the economy from the dot-com bubble bursting almost a decade earlier. The far-too-low rate of interest in the Eurozone created massive construction booms in the PIGS countries and massive overborrowing by their governments and municipalities.
Malta was saved all this turmoil. Having the Maltese Lira, governed out of Valletta we played no part in the mania. The currency was pegged to the Euro to be sure, but interest rates kept pace with inflation reasonably well. But when we joined the Euro and suddenly interest rates collapsed at Frankfurt’s direction, trouble started brewing. And this is crucial - bubbles take time to form. Our property bubble didn’t materialise on joining the Euro on January 1st 2008. Ten years of negative real interest rates later, and now Malta resembles the 2008 Costa Brava.
The ECB would scoff at this. They would point out, rightly, that I do not have an economics degree, and that they, the experts, know best and have everything in hand. This would continue their remarkable streak of getting everything wrong all the time. The current ECB interest rate is at 0%, which makes the official real interest rate in Malta somewhere close to -2%. This insane interest rate alone is enough to fuel a speculative mania. However, the real interest rate is much much higher.
The official inflation rate of less than 2% is bullshit. The ECB is constantly reworking the formula, adding hedonic adjustments and substitutions to arrive at this absurdly low number. Indeed, at 2% inflation, Malta has seen rent prices increase at a rate of 47% in the years 2013 to 2016. That alone would blow the 2% number out of the water. So with real inflation running somewhere in the double-digits, the 0% interest rate becomes a dangerously irresponsible policy prescription.
Ah, but you say. Malta is not the only country in the Eurozone. What about the other 18 members? Well, of course you cannot compare Malta to Spain, which had a property boom go bust in 2008. Nor could you compare it to Germany, which has had much lower inflation. You could compare it very easily to the other country that joined the Euro on January 1st 2008, our sister in the sea, Cyprus. And wouldn’t know it, many Cypriots are starting to wonder if their unprecedented property boom is now a bubble. Two other countries Slovenia (joined the Euro in 2007) and Slovakia (joined 2009) are also experiencing bubble-like tendencies in their markets.
I haven’t seen this movie, so I cannot tell you how it ends. Well, not exactly, I have seen pretty much every bit of crap this director has put out and I know how it ends. The boom will bust and property prices will attempt to return to their inflation-adjusted trendline with a healthly pendulum overswing to the downside on the way. Until the ECB saves us again from a disaster of their own creation by going even easier for even longer.
At some point however, one straw is one too many and the camel’s knees buckle and collapse. Asset prices collapse and bankruptcies usher in a period of depression or the Euro is finally printed into oblivion.
Edinburgh, November 7th 2018
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TLDR: The ECB is the reason why Maltese property has gone ballistic
