Determinants and current valuation of house prices in Malta

Abstract

Purpose: This study assesses whether the Maltese property prices are in line with their fundamentals or whether they are over or undervalued and, if so, by how much. By so doing, this study sheds light on the determinants of house prices. In this regard, a longrun cointegrating relationship is estimated where the fundamental value of a property depends on disposable income per capita, dwelling investment and the mortgage rate. Over or undervaluation is then measured as the difference between the actual property price as suggested by the property price index computed by the Central Bank of Malta, less the fundamental value suggested by the regression. This regression is estimated based on quarterly data spanning from 2000Q1 to 2018Q2. The results suggest that, as at 2018Q2, house prices were overvalued by 3.9 percent.