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Harry Vassallo makes the case for changing our rent laws and warns that ignoring rent reform would be dangerous
Rent Laws
The Maltese property market seems to provide an exception to the laws of supply and demand. There is no such thing anywhere else. If the rising prices do not seem to make sense against a background of oversupply - 25 percent of properties lie vacant - something must be distorting the market.
It is obviously untrue that population pressure keeps prices high: there are more properties than people can buy. They are simply not available at prices that the market can bear or simply not available at all.
High prices are the result of property hoarding for speculative reasons or because of legislative snarls. Prices always go up so people keep properties because their capital assets appear to grow whether or not the property is put to use. The showroom skeletons that dot our highways may be physical collateral used by developers to keep the banks happy. In the current formula a developer prefers to borrow knowing that property frozen as collateral gains more in value than he pays in interest. The hoarding creates the scarcity which continues to feed the investment stance. It looks like concrete, but it is actually a sackful of money.
Wealth sink
In economic terms it is simply bad news creating apparent wealth that is not matched by international competitivity or a rise in productivity. It creates upward pressure on imports, but creates nothing that can be sold abroad.
Capital gains tax was supposed to suppress speculation. It only made the market stall for a while until buyers began to grit their teeth and pay for the hikes that covered the new tax for sellers. Capital gains on inherited property will have the same effect only on a longer period.
The heirs will hang on to a property until the price they expected for it yesterday will be obtainable after payment of capital gains. Prices go up, but sales are fewer. Less tax is collected in the short term. The absurd price hikes continue to feed the fantasy that prices can go up and up forever far beyond the ability of the market to pay.
Illusions and disillusion
The fact that this appears to have happened consistently for decades confirms the illusion that nothing can change. Malta believes that it is an exception to economic laws.
Before the great property crash in Japan mortgages were made for 90-year periods. Nobody could pay the prices asked. Instead of passing title to heirs, Japanese testators passed a mortgage. I have been to a party in an English pub celebrating the sale of a property at a loss of 30,000 sterling some years ago. The owner was delighted that he did not lose much more. The economic fallout was grim.
In Malta it will not be so bad: only 10 percent of properties are mortgaged. The banks have no very serious worries. Real estate agents don’t care either way. As long as the market moves they have something to earn. The government may actually make more money if prices stall or drop because there may be more sales to tax.
It will be the owners of mortgaged properties who will be the worst off. They will be paying prices they can never hope to recover in a sale. The hop, step and jump speculation whereby people sell to buy an ever more expensive property, will be the worst hit. Those who have gone into it deepest will find that they are farthest out on a limb since their income may not cover mortgage payments and no speculation income would be available.
We can avoid this sort of worst case scenario by making a property rental market available. At least 17,000 properties are still subject to controlled rent. Easing them onto the market will provide an additional option to young couples and make property migration possible. Moving house to match one’s requirements will be more easily possible.
Low rent housing is possible if a system of incentives and disincentives were in place. Keeping properties empty is a no no and should be penalised. Low rents will become attractive if it meant that no penalty would be due on rented properties. Second homes can be exempted.
In order not to have landlords unfairly caught in a dilemma whether to rent to avoid a tax or pay it to avoid losing one’s property to a protected tenant, it should be made convincingly clear that renting out one’s property is risk free. Contract terms will be convincingly enforceable.
Ending inherited leases
An overnight conversion would be a significant economic shock and should be avoided. We could start by ending once and for all the idea of inherited leases. This could be done immediately as an amendment to the 1995 rent law. The major change it would bring would be significant economic growth in raising the value of rented property and possibly make it available as collateral reversing the wealth sink and wealth shrink it currently creates.
Another step would be further legislation confirming freedom of contract and imposing penalties on vacant uncontrolled properties. Landlords would be given an incentive to rent or sell. Rented properties would incur no penalty and landlords could confidently hang out their to-let signs knowing that they gain rent and avoid penalties. They could end up competing downwards to gain a tenant.
As controlled-rent properties are vacated they would gradually come onto the market increasing the supply of properties for rent and for sale.
Community benefits
The community benefits of such a system include a revitalisation of town and village cores, reining in the destruction of the countryside and the use and proper maintenance of very significant capital, often national heritage, assets.
In wider economic terms this would also make property hoarding and speculation unattractive as investment options providing an incentive to a more productive employment of capital. It would help if other measures were devised to encourage alternative investment particularly that creating employment and export of products and services.
It is unlikely that any spineless government can allow itself to think in such terms. It will allow the pressure to mount beyond alarm levels and prepare to blame destiny for the pre-announced disaster. It will continue to ignore the intolerable injustice whereby the poor very often subsidise the rich who occupy their properties for a pittance. The precaution of providing a safety valve to the system is simply not an option for governments that follow instead of leading.
It is left to the Greens to call the country to fairness and commonsense.
Dr Vassallo is Chairperson of Alternattiva Demokratika –
The Green Party
www.eurogreens.org
www.alternattiva.org.mt
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