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Quantitative easing in Malta revisited


Back in January 2015 in an article titled ‘Implementation of Quantitative Easing in Malta’ I had forecast the following;

“Part of the funds will be redirected into the property market. This may eventually lead to significant growth in the construction sector. The property market may be the big winner in the end.”

Although any decent economist will tell you that headline news does not necessarily represent any scientific proof, it is probably fair to assume the Asset Purchase Programme has contributed substantially, or at least partially, to the ongoing property and economic boom.

Up to the 18th of August, the Central bank of Malta purchased nearly one billion euros of government bonds at an average maturity of just over ten years. That means, that nearly one billion euros in cash have ended up in the local economy over the past two years. Part of this cash has without doubt contributed to the official 5 percent annual increase in property prices in the past two years; amongst the highest in the Eurozone.

Malta is not the only country that has experienced property inflation following bouts of quantitative easing. There is evidence that the same happened in the UK and is happening in Germany, Ireland, Austria and other Eurozone economies.

Quantitative easing is known to boost asset prices across the board. Unfortunately, this generates winners and losers. The winners are obviously the asset holders at the beginning of the asset purchase programme. On the local stage, these were mostly property owners and also Malta government bond holders.

The losers are the small savers that continue to receive peanuts for being responsible and saving regularly, but also prospective home owners that now face an increasingly steep repayment slope for often relatively inferior property. Long-term Malta government bond holders should also be concerned with the eventual prospect of rising interest rates. Expectations on when an eventual winding down of the Asset Purchase programme will occur, continue to mount.

Should the ECB and the Fed announce changes in their quantitative easing policies in the upcoming months, the withdrawal from the market of a large persistent buyer will influence market pricing of assets, especially bonds. The ECB is still continuing its quantitative easing programme but this flow is set to slow in 2018, since the former is likely to announce tapering of the latter programme from the beginning of next year.

That being said, from data gathered from other economies that have gone through the quantitative easing process, it seems that when a taper occurred, the effect on real estate showed very modest changes in values. In the US ‘tapering’ had almost no effect at all. Real estate also proved itself resilient to a rapid rise in long-term interest rates

To be fair, only the US central bank is expected to start reducing its balance sheet anytime soon, and even then, probably not this year. So historic evidence on what happens when the money supply is dramatically reduced is lacking.

In Europe, the reversal of monetary support in the Eurozone is still a long way off, the chatter and arguments in favor are increasing. The date when the ECB eventually stops support is getting closer, and with this in mind, Malta Government Bonds lose their attraction, especially in the long end.

The property market is more complex. Factors determining whether booming markets end with a soft landing usually depend on the ability of governments to utilise periods of comfortable financing to invest in education and infrastructure. Let us just hope that the number of cranes on the horizon are an indication of the latter.

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