Vince Farrugia, director general of the Chamber of Small Businesses (GRTU), made ripples last week with talk of an imminent property market crash, and the government’s duty to avoid it with measures in the next Budget. He talks to Raphael Vassallo about our national lack of strategic planning
In the press this week you were quoted as saying that ‘bad planning had led to an oversupply of ordinary apartments, even in prestigious areas’, which had negatively affected property prices in general. Could you give a few examples of what you consider to be ‘bad planning’ in this regard? During the period of consultations, on MEPA reform a strong point I made with Government was that the planning authority, in spite of the Structure Plan, operated in the absence of Development Strategies as defined by Government, and continues to operate as if the developments of the Maltese economy and the needs of the Maltese as a community were not priority items. Otherwise we would not have had the excessive construction of so many apartments aiming at a market that did not exist.
Marketing is about identifying needs and then producing solutions. MEPA simply reacts to developers. I am happy today that Government has accepted the proposal to have not just a mere Planning Unit at Castille – we had that at MEPA anyway – but a Strategic Development Unit.
The difference is that it is not merely a question of land use planning but more of a definition of what is best for us as a community living on these small Islands and how to meet our current and future needs through construction projects with the least negative impact on the environment in its widest definition.
If we had this strategic development unit properly manned and operating we would not have had so many construction projects built with little purpose, with the exception of speculation. Government would not have issued an amnesty on tax and foreign exchange frauds and evasion, allowing fund owners a free hand to invest wherever they wanted. Instead there would have been a policy guideline from the strategic unit, so that these funds would be utilised in areas of development that met specific needs of the Maltese community.
It is not a question of interference with the free market, but providing policy guidelines so that state Authorities follow intelligently what is strategically important for us as Maltese living in Malta today, and the needs of future generations in as far as these can be estimated.
Up to now we did not have strategic planning, but an insistence on a liberty which is too costly for a country with such limited territory, and with such high value patrimony to tolerate.
One of the decisions taken by the present administration was to increase the development boundaries by 2.3% in 2006, resulting in the development of more apartments despite the low demand. And yet, the GRTU appeared to favour this initiative back then. How do you account for the change of heart with regard to such decisions?
GRTU, like many organisations, reacted and proposed solutions to problems as they emerged. This is precisely what I’ve been criticizing all along. Whether in economic, fiscal or special planning, we have been operating on short-term, stop-go policies without an underlying strategy longer-term plan.
We as GRTU are players and we kick the ball when it comes our way; but it does not mean we are playing to our design.
Similarly, building height restrictions have been relaxed, in a move that directly resulted in more apartments, also in prestigious areas. Do you consider this to be one of the reasons for the present drop in property prices? As already explained MEPA does not measure the impact of one-to-one planning decision making on the overall market. It leaves the question of investment and potential loss or profit to investors. It is all a question of strategic planning, and MEPA technically was not responsible for this type of planning. The issues you highlight are symptoms of a greater malaise. This is precisely what the MEPA reform is trying to remedy.
You were also quoted as saying that ‘80% of Maltese own their own home’. This is in stark contrast with the rest of Europe, where a majority tends to rent their homes, not own them, with ramifications that affect the price of property. Malta’s unique situation is in part due to the rent law anomaly that has persisted since 1939. And yet, GRTU has criticised the present government’s initiative to reform this rent law regime. Can you explain this apparent contradiction? An important distinction exists between the situation of rented property for residential use and rented property for commercial use. GRTU has criticised, and still does, the rent reform when it comes to commercial leases. Therefore there is no apparent contradiction.
In addition, to further clarify, the rent laws were only partially responsible. I studied this phenomenon as a student. My first major study was in fact a study of the housing market way back in 1968/69. The basic truth is that the Maltese are not stupid. They know that we live on a small territory. They know that come what may, property price will continue to rise due to scarcity of land. So the Father-to-son message is: ‘Don’t spend money on rent, but invest in property’. This basic truth will not change no matter the rent policy applied.
Renting for the Maltese is only a short-term option. Incentives will help to encourage renting but the ideal economic framework where the cost of renting will equate the marginal cost of owning will not materialise. Even if it does, the Maltese will always perceive that the clever option is to buy.
You have often criticised the fact that, as a result of amnesties offered by government to people who had money deposited overseas, a large part of the re-injected capital was invested in property, resulting in the development of more units than could be catered for by existing demand. How do you propose to address this issue now? Amnesties are always bad. When people breach the law they should be punished, not rewarded. However if an amnesty is to be given, then the community must benefit. In all the amnesties given so far, benefits were primarily directed at the defaulter. This is crazy. This is what I criticize. The funds that have been liberated as a result of these amnesties should have been used to have more housing for the needy, more affordable comprehensive estates for newly-weds, more retirement homes, and more projects in the harbour, among others.
There is so much there could be done in Malta if only we knew how to guide the private investors to the projects according to the need of the community.
What is GRTU proposing, in concrete terms for the immediate present, to address the issue of falling property prices? The encouragement of first-home buyers. They are essential to boost the market. With a package of incentives directly aimed at this market, many new couples and families that want to change their properties will have a one-time opportunity to obtain a decent home.
You hinted that government should reduce withholding tax from 35% to 12% in its forthcoming budget. Can you explain the ramifications of this decision, should your advice be taken up? The 12% tax was originally introduced to resolve what was perceived to be an acute economic problem. Owners were hoarding property as they refused to put land on the market and pay 35% of added value of the price of the property as taxation.
The result was that there was a shortage of good property land for building, and as the volume of available money increased dramatically as a result of the amnesty, the price of apartments shot up as demand was much higher than supply. The 12% final withholding tax was an incentive to cause more land to come on the market, and it worked.
The economic situation has now turned: there are too many apartments on the market and too many projects still in the pipeline. Those in the pipeline will not be finished before the lapse of five years and therefore developments will not benefit from the option to switch from 35% tax rate to 12% withholding. This is why GRTU is proposing an extension of the five-year option to an eight-year option. GRTU is also proposing a reduction of the 12% to 7% for a period of 2 years so that buildings ready for sale will be sold.
For the people who have delayed their home purchasing due to the high prices and the tough taxation, GRTU is also proposing an even lower rate of taxation for first time buyers. It must be remembered that the final withholding tax essentially pushes up the price of the property irrespective if the market is moving up prices by the same margin. This simply does not happen when the market is over supplied. It will however happen if the supply is diminished. So the fiscal action recommended by GRTU will not only support buyers and relieve developers but will also stabilise property prices. And we are today all property owners.
Finance Minister Tonio Fenech recently lashed out at the banks, saying they could do more to help ailing businesses by introducing moratoria on loan repayment defaulters, among other initiatives. Applying the same principle to home ownership, should home loan defaulters be assisted in view of the current economic climate? GRTU is not recommending moratoria to loan defaulters. We are saying that under today’s circumstances many have suffered loss of income due to loss of jobs, overtime and part time earning while many businesses are suffering drop in sales as a result of the dip in household disposable income. GRTU does not want people to default but in the absence of moratoria on loan repayments, people are being forced to curtail their consumption patterns suffering thus a lowering of standards.
The remedy GRTU is proposing is a temporary remedy, which is normal during a time of recession. The banks made hefty profit during the boom period. It is only fair that now they bend backwards to help the economy.
Considering that property prices are in no small way influenced by popular perceptions, is it wise to draw so much attention to the drop in prices, when this might compound the impression of a market in collapse, thereby hastening the collapse itself? There is a lot of perception in marketing. One should be careful what words to use. Very often the words quoted are not always the words actually uttered. Unfortunately however markets do tend to take desperate upward or downward spirals if no option is taken. We have a habit in Malta to intervene with solutions when the underlying market conditions have already changed. It’s the delayed process in decision-making. I’m insisting with Government to take action to correct the market with timely action.
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