The Malta
This question is often asked in relation to the sharp increase in
property prices experienced over the last few years. An authoritative answer
thereto is well nigh impossible, as experience shows that it is difficult to
identify a bubble in real time. In fact, even if an asset price bubble exists
there is no assurance that this bubble will keep inflating to the point of
bursting and unless it bursts, its prior existence cannot be proven by
subsequent events. Only a bubble that bursts can be proven a
posteriori.
The responsibility for avoiding the creation of dangerous asset price bubbles lies primarily with the monetary authorities, in our case the Monetary Policy Council of the Central Bank ofMalta
One could be forgiven for forming the impression that monetary authorities are much more focussed on retail price stability and only give attention to the asset price inflation when it is often too late to prevent it. This is not restricted to domestic experience. The US Federal Reserve chairman Alan Greenspan, its factotum for the last 18 years and now nearing the end of his tenure, has in the past maintained that central banks should not use monetary policy to spike a bubble, but only to cushion its aftermath effects. This, however, says little about the obligation of central banks to use monetary policy to avoid the formation of the bubble in the first place or to deflate the forming bubble before it enters the bursting risk area.
In recent years, the Bank of England and the Federal Reserve of Australia have used monetary policy instruments (read “rising interest rates”) to calm down property prices, even though the consumption economy could have performed better with, and probably deserved, lower interest rates. Pitching the interest rate level at a fine balance, so that it is low enough to promote economic growth and high enough to promote savings and orderly asset market price development, is immensely tricky. Interest rates decisions are based on past and current experience, but the effects are felt after a substantial time lag. By the time the effects could hit the economy the scenario which had originally justified the interest rate decision could be quite different, requiring a different approach.
In the local context, we are experiencing quite a novel market reality which makes the interest rate decisions of the monetary authorities particularly complex and hazardous. The economy is growing well below its potential, a situation that normally calls for a reduction in domestic interest rates. However, in the international markets nobody is really talking about reducing interest rates and theUS
The near zero savings ratio and the unhealthy increases in equity and property prices would, on the other hand, suggest the need for an increase in interest rates which would act as a further brake on the real productive economy.
There is a new phenomenon working out in the economy. In spite of slow growth in productivity and earnings, people have maintained their consumption by reducing their savings and, in many cases, by incurring consumer debt. Low interest rates and increasing wealth through higher values commanded by residential property (plus the availability of second mortgages and equity release loans to translate this increase in value into ready liquidity) is leading to consumption levels which would otherwise by unsustainable by current earnings and productivity.
The government recently requested the MFSA to conduct an exercise to establish whether more flexible home-loan facilities with little or no up-front contribution by the borrower and a repayment programme spread over 40 years is leading to an undue stimulation of property prices.
This is an odd request – both in it being made and in the way it has been addressed. MFSA are regulators for individual institutions, but the direct responsibility for monetary policy and financial stability rests with the Central Bank. If any organisation should be conducting such an exercise it should be the Central Bank and, given its autonomy, it should need no prompting from the government to do it. Indeed, such an exercise should be a continuing one – with the data being regularly fed to the Monetary Policy Council thus enabling it to take it into consideration with other economic data in arriving at decisions related to the implementation of monetary policy.
Is the government losing confidence in the ability of the Central Bank to contain asset price inflation? Could not the very fact that government felt the need to make its odd request to the MFSA increase instability in a hot market leading to a disorderly price adjustment process?
It is in everybody’s interest that order is restored in the property market without destabilising one of the few sectors contributing to economic growth. The object-ive should be to cool down the upward price spiral without imposing high interest rates and without causing the property market to crash under the weight of over-development.
Reducing flexibility in the home mortgage package is the wrong place to start to restore order. Provided that borrowers ability to repay over the working life is established, more generous mortgage terms do not worry me. Interest only loans and consumption loans based on second mortgages or equity release scare me much more. Killing off demand could be counter-productive to the aim of restoring price stability in the property market. Dangerous build-up on unused housing stock could become a dangerous powder keg which could prove explosive when domestic interest rates eventually have to respond to international pressure or domestic retail inflation.
Given the substantial development pipeline, probably the best way to begin preventing the bursting of the property bubble is for government to direct Mepa to take a brief moratorium in the approval of fresh condominium development.
The responsibility for avoiding the creation of dangerous asset price bubbles lies primarily with the monetary authorities, in our case the Monetary Policy Council of the Central Bank of
One could be forgiven for forming the impression that monetary authorities are much more focussed on retail price stability and only give attention to the asset price inflation when it is often too late to prevent it. This is not restricted to domestic experience. The US Federal Reserve chairman Alan Greenspan, its factotum for the last 18 years and now nearing the end of his tenure, has in the past maintained that central banks should not use monetary policy to spike a bubble, but only to cushion its aftermath effects. This, however, says little about the obligation of central banks to use monetary policy to avoid the formation of the bubble in the first place or to deflate the forming bubble before it enters the bursting risk area.
In recent years, the Bank of England and the Federal Reserve of Australia have used monetary policy instruments (read “rising interest rates”) to calm down property prices, even though the consumption economy could have performed better with, and probably deserved, lower interest rates. Pitching the interest rate level at a fine balance, so that it is low enough to promote economic growth and high enough to promote savings and orderly asset market price development, is immensely tricky. Interest rates decisions are based on past and current experience, but the effects are felt after a substantial time lag. By the time the effects could hit the economy the scenario which had originally justified the interest rate decision could be quite different, requiring a different approach.
In the local context, we are experiencing quite a novel market reality which makes the interest rate decisions of the monetary authorities particularly complex and hazardous. The economy is growing well below its potential, a situation that normally calls for a reduction in domestic interest rates. However, in the international markets nobody is really talking about reducing interest rates and the
The near zero savings ratio and the unhealthy increases in equity and property prices would, on the other hand, suggest the need for an increase in interest rates which would act as a further brake on the real productive economy.
There is a new phenomenon working out in the economy. In spite of slow growth in productivity and earnings, people have maintained their consumption by reducing their savings and, in many cases, by incurring consumer debt. Low interest rates and increasing wealth through higher values commanded by residential property (plus the availability of second mortgages and equity release loans to translate this increase in value into ready liquidity) is leading to consumption levels which would otherwise by unsustainable by current earnings and productivity.
The government recently requested the MFSA to conduct an exercise to establish whether more flexible home-loan facilities with little or no up-front contribution by the borrower and a repayment programme spread over 40 years is leading to an undue stimulation of property prices.
This is an odd request – both in it being made and in the way it has been addressed. MFSA are regulators for individual institutions, but the direct responsibility for monetary policy and financial stability rests with the Central Bank. If any organisation should be conducting such an exercise it should be the Central Bank and, given its autonomy, it should need no prompting from the government to do it. Indeed, such an exercise should be a continuing one – with the data being regularly fed to the Monetary Policy Council thus enabling it to take it into consideration with other economic data in arriving at decisions related to the implementation of monetary policy.
Is the government losing confidence in the ability of the Central Bank to contain asset price inflation? Could not the very fact that government felt the need to make its odd request to the MFSA increase instability in a hot market leading to a disorderly price adjustment process?
It is in everybody’s interest that order is restored in the property market without destabilising one of the few sectors contributing to economic growth. The object-ive should be to cool down the upward price spiral without imposing high interest rates and without causing the property market to crash under the weight of over-development.
Reducing flexibility in the home mortgage package is the wrong place to start to restore order. Provided that borrowers ability to repay over the working life is established, more generous mortgage terms do not worry me. Interest only loans and consumption loans based on second mortgages or equity release scare me much more. Killing off demand could be counter-productive to the aim of restoring price stability in the property market. Dangerous build-up on unused housing stock could become a dangerous powder keg which could prove explosive when domestic interest rates eventually have to respond to international pressure or domestic retail inflation.
Given the substantial development pipeline, probably the best way to begin preventing the bursting of the property bubble is for government to direct Mepa to take a brief moratorium in the approval of fresh condominium development.
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