(ARTICLE WRITTEN BY ANTOINE BRIFFA)
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.
The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri & Co. Ltd. (CC) has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views or opinions appearing on this website.
This website is owned and operated by Calamatta Cuschieri & Co. Ltd (Co. Reg. No. C13729) of 5th Floor, Valletta Buildings, South Street, Valletta VLT 1103, Malta. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority.