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Property price misalignment with fundamentals in Malta

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  • Brian Micallef

    (Central Bank of Malta)

Abstract

This paper computes an aggregate ‘misalignment’ index using a multiple indicator approach to identify under or over-valuation of house prices in Malta based on fundamentals. A total of 5 indicators are used that capture demand, supply and banking system factors: the house price-to-RPI ratio, the price-to-income ratio, price-to-construction costs ratio, dwelling investment-to-GDP ratio and the loan-to-income ratio. These indicators enter the index in ‘gap’ form, that is, as a deviation from their trends or long-run averages. The weights are derived using principal component analysis. Based on the Central Bank of Malta house price index, the misalignment indicator shows a period of overvaluation in house prices that peaked in 2006-2007. This disequilibrium started to be corrected following the decline in house prices, reaching a trough in 2013. Starting in 2014, however, the index started to recover such that, by end-2015, house prices were broadly in equilibrium.

Suggested Citation

  • Brian Micallef, 2016. "Property price misalignment with fundamentals in Malta," CBM Working Papers WP/03/2016, Central Bank of Malta.
    • Handle: RePEc:mlt:wpaper:0316
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    File URL: https://www.centralbankmalta.org/file.aspx?f=31444
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    References listed on IDEAS

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    Cited by:

    1. Markus Hertrich, 2019. "A Novel Housing Price Misalignment Indicator for Germany," German Economic Review, Verein für Socialpolitik, vol. 20(4), pages 759-794, November.
    2. Joseph Falzon & Claire Jean Hann & Rebecca Dalli Gonzi, 2023. "Leveraging Value Adding Factors Through the Construction Development Cycle – Factors Changing the Property Value Landscape," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 3-23.
    3. William Gatt & Owen Grech, "undated". "An assessment of the Maltese housing market," CBM Policy Papers PP/02/2016, Central Bank of Malta.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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