Analysing Malta’s housing supply–price relationship : a stock-flow approach

Abstract

This dissertation analyses the relationship between the housing supply and house prices in Malta and Gozo. The relationship underpins important implications about house prices, the speed of adjustment of housing markets and housing affordability. This relationship is analysed using a stock-flow model of Malta’s housing market estimated using an error correction model - a macroeconomic approach in which both the demand and supply sides of the housing market are estimated in the long and short run. The estimates show that Malta’s long run price elasticity of housing supply is fairly elastic, with housing supply increasing proportionally more than prices in the long run. In the short run, the adjustment of dwelling investment to its long-run equilibrium is found to be slow (at 19.5% per year), whilst house prices are found to adjust far quicker (at 56.1% per year). Increases in the housing stock are found to decrease house prices in the long run. These results show that although Malta’s housing supply is slow to react in the short run, it does react strongly in the long run. This can put pressure on prices in the short run especially in the presence of a large shock. However, in the long run, supply increases proportionally more than prices which makes up for the previous shock, which pushes the potential price down.