“Cecil Graham: What is a cynic?
Lord Darlington: “A man who knows the price of everything, and the value of nothing.”
Cecil Graham: “And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything and doesn’t know the market price of any single thing.”
Will New Law Reveal the True State of Property Prices in Malta?
This blog post is a response to the article titled ‘Reporting changes may improve property statistics’ dated 21 May 2015 and published on Times of Malta. (Link)
So what do you think your house is worth? The old adage is that its worth what someone else is prepared to pay for it; and probably the most objective form of that is what someone has JUST PAID for it. Then it’s a fact not an aspiration. We also need to be clear that in the housing market (unlike perhaps a work of art or a piece of literature) we are really only concerned with the objective issue of PRICE rather than the abstract concept of ‘value’.
The problem here in Malta is that as far as house prices are concerned, official statistics are not based on this objective figure of ‘what someone has just paid for it’, but on a survey of ‘ADVERTISED PRICES’ which really means what the seller thinks or hopes they can get for it, not what they actually will.
When deciding on the right price for your property – what do you base that on? Ideally it should be the ‘comparators’ – the price that houses of a similar type, size and quality located in a similar neighbourhood have recently sold for. But in Malta that is the underlying challenge – since all you have to compare your house to is; the advertised prices of similar houses, not the real prices being achieved.
While advertised prices may be an interesting statistic, it can also become a self-fulfilling prophesy! So as you read ‘house prices have risen by 3%’ the presumption is that your house is now worth 3% more and so should be advertised at this new higher value – an inflationary spiral of expectations! Also, a crucial piece of information in determining whether the market is stable or whether it’s in speculative bubble-mode is the gap between advertised and realised prices.
One of the major risks at present, should there be an adjustment in the housing market, is the possibility of buyers, particularly young first time buyers, ending up in a ‘negative equity’ situation – where the price they can subsequently sell their house for is less than the mortgage they owe. Instead of having a deposit for their next house, they have to find cash to clear the gap caused by the negative equity.
Here at HomeSaleMalta.com our business model is to help sellers decide on a realistic price which will then attract the buyers they want, leading to effective sale of the property. Often we find sellers have, initially, an unrealistic understanding of the appropriate ‘price’ for their property based on their understanding of house ‘values’ as seen advertised (with many of these advertised properties having been on the market for years because no one is prepared to actually pay that price); or official statistics on house price growth based on a similar approach to valuation.
Plans are now in place to change this – with effect from 1 July, the price they have paid for their new abode will be declared.
So is the new system going to sort the problem? – we at HomeSaleMalta.com think that while it will help, there are a few features that could be improved.
For starters, when LN 147/2015 is enacted, only the 90 or so estate agents – who only account for about two-thirds of the market – will be bound to report transaction information.
Property sold direct or brokered by other third-parties will not be included in annual statistics, thus the information we’ll have in hand eventually will still be far from definitive.
Secondly, since the old taxation system used to give the option of either paying capital gains tax (CGT) or FWT, there is less incentive to inaccurately represent the price as the seller would then have to pay more CGT.
With the phasing out of CGT, the FWT system could motivate vendors to report lower prices to pay less tax. It all depends on whether the stakeholders involved choose to provide the accurate details about the price paid.
Surely the final ‘reporting’ of any property transaction should be with the Notary Public? Should it not be they and not an Estate Agent (representing only 1/3rd of transactions) who is responsible for logging every accurate transaction?
You see, if we don’t ALL chip in – agents, notaries, policymakers and vendors – to make sure our industry is based on solid accurate information, instead of focusing on seeing how far we can stretch prices, the industry will inevitably snap back to ‘correct’ itself: leading to many would-be buyers out-priced from the market and the ‘spectre’ of ‘negative equity’ a reality.