This means that, over the same period, borrowers have become markedly more vulnerable to interest rate rises. Overvaluations in residential real estate  I would now like to turn to the residential real estate market. Numerous indicators point towards overvaluations in this market, since price increases in recent years have been steeper  Page 8/12  than can be explained by fundamental factors. This applies across all residential segments, i.e. single-family houses, privately owned apartments and apartment buildings. The extent of overvaluation is difficult to quantify. Slide 4 illustrates this, using the privately owned apartment segment as an example. It shows two simple indicators and the results of two models, used to measure the valuation of privately owned apartments. Both indicators, i.e. the price-to-rent ratio (in light blue) and the price-to-GDP ratio (orange), reveal an overvaluation of around 30%. An econometric model (red), which explains current prices based on developments in GDP, housing stock and interest rates, shows an overvaluation of roughly 20%. 10 Finally, the ‘user cost model’ (dark blue) reveals a broad range of overvaluations, depending on different assumptions regarding future interest rate and rental developments. 11 Assuming for example that real mortgage interest rates will return to their historical average of 2.6% over the long term, the resulting overvaluation amounts to roughly 30%. If, by contrast, the assumption is a real mortgage interest rate of 1% over the long term, the overvaluation decreases to around 5%.
I have just seen that our two main banks are moving in this direction and are also giving preferential treatment to mortgages. You also have to remember that a bank manages two sides of the balance sheets. It collects interest from borrowers but it pays interest to depositors. It is the efficient management of the difference between interest earned and interest paid that earns a bank its profits. Given that both lending and deposit books may differ from one bank to the other, there could be various reasons why the full interest rate cut is not passed on to the customer straight away. Are you optimistic that these interest rate cuts are enough to stave off recession? Monetary policy is just one instrument available for macroeconomic adjustment, so it has a limited capacity. It just tries to achieve price stability, because without price stability you cannot have long-term investment plans plus economic growth and employment. The problem is deeper than that. We need a coordinated effort at the political, central banking and regulatory levels. There is talk of a looming recession in Malta. Do you agree with this argument? I have not seen any economic indicators which at this point in time suggest that this scenario is imminent. I would rather wait to see the figures as they come out. So far we have an average growth rate of over three per cent for the first half of the year.