As banks become more exposed to the property market, economists are calling for action to improve the situation before it reaches boiling point.
Reacting to the Central Bank’s warning about heightened credit risks of banks due to declining property prices, economists were not unanimous about the urgency but agreed on the need for steps to be taken.
HSBC Malta and Bank of Valletta downplayed their exposure in replies they gave to questions by The Times.
Banks in Malta are exposed to the property market in various ways. Home lending is the smallest of their concerns because it is uncommon for first time buyers to default on their loan repayments (even though this is on the rise across the EU).
Banks take their biggest risks when they lend money to property magnates (when there is already an oversupply of real estate) or to businesses while keeping property as collateral. In both cases, if property prices keep falling, the banks will bear the brunt.
Economics professor Lino Briguglio says such “double exposure” is “very risky” and creates excessive dependence on the property market.
But while the prevailing situation is not ideal, Prof. Briguglio thinks real estate is still generally a good investment, even though there are dangers associated with excess supply of property that “need to be curbed”.
“Fortunately, the situation is not at crisis point and it is comforting to note that the government, the Central Bank and the commercial banks are aware of the potential dangers of the banks’ dependence. This in itself should provide a degree of comfort to bank depositors.”
However, he says the authorities should take steps to better regulate the construction sector while the financial regulator should take a serious look at banking practices to ensure risks of commercial banks are adequately diversified.
Economist Gordon Cordina points out that that the downward trend in property prices is both “gradual and selective”. While quality real estate continues to attract good business, lower value propositions are suffering.
This is not “particularly worrying”, he says, downplaying the urgency of the Central Bank’s Financial Stability Report.
“In a way, it says nothing which has not been known. Banks have, for the past years, been lending on the basis of sufficient collateral, backed by sound business plans, including the emphasis on good quality when it comes to real estate development.”
But to sustain the property market, Dr Cordina believes the country needs to generate more wealth and help the economy grow through a more export-oriented approach. In real estate, this may mean getting foreigners to buy property. However, the property market will also increase if Maltese people are wealthier, so it is also other aspects of the economy that need to be boosted.
Financial analyst John Cassar White seems more concerned about the situation and thinks that there needs to be concrete action to step things up, starting with a proper index to measure property sale shifts, as is done in Ireland. (Recently, the Malta Developers Association called for a proper study of the market to ensure the country’s policies are founded on fact.)
The market must be more “transparent” and the ways of measuring property are “defective” because they are based on advertised prices not actual sale prices, he says.
Stressing that the property market should not be subsidised by taxpayers’ money, Mr Cassar White called for a series of small measures to stimulate the market, such as the reintroduction of incentives to foreigners to buy property in Malta. (The government has already promised it would replace the Permanent Residence Scheme that allowed foreigners to buy property locally and which was stopped because it was being abused.)
He fears the government and the planning authority are sometimes too eager to encourage the generation of wealth through development, without realising this is a double-edged sword in a country which has 50,000 unsold properties.
Rather than investing so much in property, the country should boost the economy through investment in productive technology and updating industries.
Asked to explain and quantify its exposure to the property market, Bank of Valletta says “real estate finance” only accounts for five per cent of its loan book (€180 million out of €3.6 billion last September).
However, this figure does not include private home loans. Nor does it include the bank’s exposure to property through collateral from business loans. But, in this case, the bank says the property is not in itself “the source of repayment”. “It simply acts as an additional safeguard for the bank should the borrower default. In such cases, the exposure to property is indirect and the bank gives primary consideration to the feasibility of being repaid from the cash flows generated by the activity that is being financed.”
HSBC did not quantify its exposure but said it took a conservative approach to provisioning on its lending portfolios and holds “more than adequate” levels of provisioning.
“Provisioning levels are constantly reviewed both based on the performance of specific accounts and in the light of market conditions and the performance of different types of lending and sectors within the portfolios.”