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NEWS | Sunday, 02 September 2007

Property proposals: pretty vacant?

If Labour is so concerned with rising property prices, why does it make proposals that would push the same prices up? Raphael Vassallo on the incompatibility of party politics with market forces

If ever there was evidence that the art of politics is all about perception, the sudden electoral focus on house prices must be it.
The symptoms have been visible for a while now: newspaper polls which reveal staggering majorities concerned with the “rising cost of property”; young couples remonstrating about the unaffordability of suitable homes; developers caught in the cross fire of aggressive environmentalist campaigns...
But is the price of property really spiralling out of control? Some think not. Economist Lino Spiteri recently suggested that, while undeniably rising, property prices have actually already begun to visibly plateau. But the perception remains that Malta is fast becoming too expensive a place for first-time buyers to get a foot in the door. And with the country gearing up for election, it is perception, not reality, that ultimately carries the day.
As usual, the Malta Labour Party has been shouting the loudest on this issue, which it evidently considers an easy vote-catcher. Labour has in fact just launched an ambitious (and expensive) scheme, which it claims will alleviate the financial pressures on young couples buying their first home. Being a political party, the emphasis is squarely on the downtrodden, underprivileged family… which also means that little thought was given to the actual forces which drive property prices out of these families’ reach to begin with.
Couples buying their first home, we are told, will benefit from government aid to the tune of 10 per cent of the property price, so long as the property does not exceed Lm50,000.
OK, I admit I am not an economist, but I do understand at least its entry-level laws: and at a glance, Labour’s policy seems to play directly into the hands of the seller.
Any scheme which empowers low-income earners to purchase a property at current market prices, will also by definition remove any impetus for the seller to settle for less. Admittedly, the beneficiary of the scheme may well feel grateful for the nice Lm5,000 generously thrust into his pocket by Dr Sant. But in real terms, what effect could this scheme possibly have, other than encourage market prices to remain exactly the way they are?
Even more inflationary is Labour’s second proposal, which would cap interest rates at 4.5 per cent. Again, this would undeniably ease the pressure on home-owners when it comes to meeting loan repayments; but wouldn’t it also mean that prospective buyers will afford to borrow more than was previously possible? From the seller’s point of view, this means that the buyer can also afford higher prices… and you don’t need to be Adam Smith to figure out the inevitable consequence.
I asked one property negotiator, who preferred not to be named, what he thought of the scheme: “It depends what you’re after. From the industry’s perspective, the more the banks and government assist buyers, the more properties we can sell. If you want the situation to remain as it is – i.e., with prices going up and up and up and up – then subsidising buyers or capping interest rates is a good thing. If, on the other hand, you want to stabilise those prices, then of course it should be the other way round…”
‘Nuff said.

Supply versus price
As tends to be the case in such a politically charged environment, any proposal made by Labour immediately beggars comparison with its Nationalist equivalent. And the Nationalist government’s response to burgeoning property prices? Simple. More construction = more properties = oversupply = price reduction. This was, in fact, foremost among the justifications provided by Prime (and Finance) Minister Lawrence Gonzi for last year’s decision to extend the ODZ boundaries by 2.3 per cent.
“Property prices are sky high, and there had been calls for government to tackle this problem for hundreds of young couples who are getting married,” Gonzi said when faced with a veritable green uprising in June 2006. “It’s a very important point and we have a duty to respond to this issue.”
Gonzi went on to argue that the development zones extension would result in an increase in the supply of housing, thereby lowering prices by the law of supply and demand as outlined above.
At face value the logic appears to be flawless. Until you take into consideration that for a wide variety of reasons – some of which require a PhD in Advanced Freakonomics to even begin to understand – the Maltese property market has never quite been governed by the simple law of supply and demand. Pundits estimate that property has appreciated between eight and 10 per cent over the 15 to 20 years: a trend which has continued unabated, despite a recent (and exponential) increase in new properties on the market.
Besides, Gonzi’s “social argument” appears uncannily similar to a proposal put forward by Labour’s housing spokesman Karl Chircop, who purports to counter rising prices by “flooding the market with cheap housing”… another idea which quite frankly overlooks even the most visible realities of the local scenario.
On another level, one can argue that by opening up more land to development, the finite (and already very limited) supply of developable land will be reduced still further, thereby automatically increasing its value. And that’s not to mention the dire environmental cost of the strategy.

Market flooding
ON the subject of environmental cost: what are the Greens saying? Good question. In fact AD has just published its own proposals for the forthcoming budget, and housing takes up a sizeable chunk of the document. At a glance, they also seem to favour the market-flooding argument… not by building more, but rather by tapping into Malta’s wealth of unutilised properties.
AD estimates that there are 40,000 vacant units on the island; many of which are second, third, fourth or even fifth properties, and some of which are literally falling to bits. By “re-activating” those vacant properties, they believe they can also address the same “oversupply” argument favoured by both Labour and PN, while at the same time creating a healthy rental market that might somehow act as “competition” to the current home ownership regime.
The only trouble is that in order to achieve this, those vacant properties would have to be taxed. And “tax” is not a word any political party likes to use with an election round the corner.
In any case: AD’s budget proposals stipulate a 0.45 per cent tax on the value of a second, vacant property… which value is determined by the owner himself. On a hypothetical property worth LM40,000, the annual tax to be paid would be Lm180. To help wash down this particular pill, AD suggest that any subsequent income from renting the same property will be tax-free. Theoretically, this would entice owners of vacant properties to rent them out, and conceivably make a tidy profit to the bargain.
But would it stabilise market prices? Difficult to say. One drawback is that much of the logic appears rooted in the unshakable belief that a vibrant rental market would act as a panacea to all our housing problems. There are counter-arguments: for one thing, home-ownership provides the added benefit of investment, making it hit a spot which renting just can’t reach. For another, it is not written in stone that a sudden surplus of rentable properties would entice young people to actually rent. After all, they could just as easily keep living with mum and dad until they can afford the 10 per cent deposit required for purchasing… a not-unheard of situation in a country which is plainly family-mad.
But at least, we seem to be dealing with a genuine attempt to get to the foundation-stone of the problem, instead of merely plastering the façade. Perhaps it would be helpful if economists occasionally stepped into the fray, instead of letting journalists and politicians do all the talking.


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Property proposals: pretty vacant?

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