An empirical review into possible determinants of housing prices in Malta

Abstract

Year-on-year increases in the Maltese housing-price index has attracted the attention of policy makers and other institutions related to the property market and social well-being. Given Malta’s geographical limitations and changes in demographic, cultural and other key macroeconomic factors, the housing market has turned into a scarce and desirable resource. This dissertation analyses the effect of key fundamentals on housing prices, using the ‘Central Bank of Malta Property Price Index’ to capture housing price dynamics between the period between 2004Q1 and 2017Q4. Following a review of relevant academic literature and a qualitative analysis of the main variables in the context of the Maltese economy, the chosen explanatory variables included in the model comprise ‘Housing Permits’, ‘Population Growth’, ‘Mortgage Rate’ and ‘Unemployment Rate.’ Using a Vector Error-Correction model (VECM) via the Johansen procedure, the pre-tests initially revealed that all the used variables are integrated of order one, I(1). The Johansen test for cointegration indicates the presence of one cointegrating vector which ultimately allows the modelling of relationships through a VECM. Results for the long-run estimates confirm the existence of a long-run relationship through the negative coefficient obtained by the Error Correction term. The short-run dynamic equation also shows evidence of a relationship between housing prices and the fundamentals through statistically significant lagged coefficients. The short-run dynamic relationships were further analysed via the Granger Causality tests. These suggest a one-directional short-run causality running from housing permits to lagged house prices. Moreover, the joint effects of all four lagged variables were found to be statistically significant, indicating that Housing Permits, Population Growth, Mortgage Rate and Unemployment Rate are all fundamental in predicting changes in housing prices locally.