Understanding the relationship between tourism and house prices in Malta

Abstract

This dissertation investigates the relationship between tourism and house prices in Malta, for the period 2002Q1 to 2019Q4. Whilst the determinants of house prices have received extensive attention in urban economics, tourism has not been thoroughly considered as a factor for the changes in housing markets. Hence, this study contributes to the literature particularly in the Maltese context by including tourism demand-side and supply-side variables to the conventional determinants of house prices model. Insights gathered from the relevant literature and qualitative analysis of the main variables in the context of the Maltese economy identify the following appropriate choice of variables; house price index, inbound tourists, hotel beds, building permits, unemployment rate and mortgage rate. The regressors are employed in a multivariate Autoregressive Distributed Lag (ARDL) bounds test model which provides evidence of cointegration. Estimation of an ARDL long-run model confirms the existence of a long-run positive relationship between inbound tourists and house prices in Malta. This study argues that tourism demand for rental accommodation competes with local housing demand, which reduces residential housing supply and increases house prices. Results also provide evidence of a positive and statistically significant long-run relationship between building permits and house prices, possibly due to housing speculation and rising demand expectations. The unemployment rate resulted a negative and weak statistically significant long-run relationship. Empirical findings have been assessed and evaluated within the current context of the Maltese economy. The error correction term (ECT) in the short-run dynamics regression indicates that following a shock in the short run, house prices adjust relatively rapidly back to the long-run equilibrium. The negative and statistically significant coefficient of the ECT further signifies the presence of cointegration.