Watchdog to probe banks' lending terms

The government has asked the Malta Financial Services Authority to probe the banks' lending terms, amid concerns over the steep rise in the price of property.

Parliamentary Secretary Tonio Fenech told The Times the government was contemplating the introduction of partial controls.

He has proposed that the MFSA looks closely at the terms being offered by lending institutions and evaluates whether it is appropriate to issue regulations that will demand more prudent terms.

Mr Fenech made it clear that the government had no intention of regulating the housing sector but underlined the importance of striking a balance in a sector dictated by the island's finite land mass.

"Easy access to liquidity always leads to inflation, which is being triggered because people are willing to pay for it," he said.

"If people are finding that kind of liquidity available to them, then they must be getting it from the banks that are being generous with the credit terms."

Mr Fenech said it was a well-known fact that banks were providing up to 100 per cent of the property's selling price. Though many buyers were investing in their future, one also had to look into the repercussions of the provision of 40-year loans.

There are several options available to the government, one of which is whether to emulate the Spanish model, where specific legislation dictates that banks may lend up to a maximum of 90 per cent of the property price.

The MFSA plan ties in with two other initiatives the government intends taking to create competition in the housing provision sector.

The government is considering the introduction of a regulated housing market for properties developed by the Housing Authority. Under this scheme, individuals who buy housing units provided by the authority would, if they wish to sell their properties, be required to sell to the authority at a price which would be indexed to the rate of inflation.

The government is also trying to boost the rental market by establishing an advantageous final withholding tax regime.

"With a little bit of intervention we may play a part to ensure prices stop escalating in this manner," Mr Fenech said.

A spokesman for Bank of Valletta, however, said that rising property prices had nothing to do with the financing provided by the banks to customers.

Indeed, property prices, he said, are influenced primarily by demand and supply factors. Like any other commodity, house prices are subject to this market mechanism.

Home financing is an area in which banks compete in an active manner. Such competition has resulted in more affordability and customer access to finance, the BOV spokesman said.

"As examples, we have introduced a longer term for loan repayment. We are also offering lower and preferential interest rates for home owners compared to a few years back."

Such trends, the direct result of competition in a liberalised market, had widened the opportunity for customers to own their residential property, he said.

Clearly, he added, banks were being more supportive to personal customers in helping them, through finance, to acquire their own residence.

But it was standard practice, by way of security, that banks took a charge over the property being purchased. By way of further protection, customers were also required to provide a pledge on a life policy as well as a comprehensive insurance policy.

The spokesman claimed the bank only extended end finance and required customers to contribute up front in financing the home purchase.

"Moreover, the bank always seeks to encourage customers to get value for money and proceeds with the greatest prudence for the mutual benefit of both parties."

Dhalia manager Michael Mifsud estimates that property prices have shot up by 400 per cent in the last 10 years.

Agreeing that property was becoming unaffordable, Mr Mifsud added, however, that people were still investing in it: "I'd like to know where the money is coming from."

Mr Mifsud believes that banks have certainly been far more generous in their lending terms but he added: "I'm sure lending institutions are doing their homework before forking out the money."

He believes prices are now stabilising and those who are pricing their property unrealistically are not managing to sell.

"Prime properties are still selling, irrespective of the price, but there's a selected type of clientele for this sector of the market."

Mr Mifsud argued it was mainly the 2003 scheme for the repatriation of money that led to an explosion in the property market.