This is a quick reply to an article posted here. Of course, it’s saddening to see the Labour Party digging itself into the abyss of the rent-seeking jungle instead of admitting to its own faults.
We have arrived at the point of extreme greed and shamelessness when it comes to the rent-seeking marriage between the construction industry and the major political parties. No one bat an eyelid as Deborah Schembri, previously the Government Minister responsible over construction and development policies has now been appointed as the official representative of the construction industry. Schembri was congratulated by Joseph Muscat in bizarre Facebook post and apparently it seems to have become normal to use the Labour Party as a platform for a get rich quick career in the politics of rent-seeking.
Meanwhile, someone from the Labour Party decided to pen a convoluted article with a narrative about Labour saving the housing market. The article is full of mistakes and half-truths and I have penned them here for your perusal.
“In early 2020, the Maltese property market gave signs it was going to tank.”
A market which goes up by more than 100% in the span of five years and then makes a meagre 10% correction does not mean that “the market was going to tank.”
“The number of final deeds of sale fell from over 1,000 in previous months to little more than 550 in May 2020.”
Shock and horror if we mean-revert to the levels before the property market started heating up.
“The future looked dire.”.
Indeed, for an over-leveraged contractor who had emptied all his lines of credit but couldn’t sell the large number of over-expensive apartments built on debt to gullible foreigners who can’t come to the islands due to the pandemic, the future looked very dire.
“At the end of the first quarter of 2020 house prices were 4.4% below their end-2019 value. To give some perspective, in the rest of Europe they were 1.4% up.”
Malta is the only nation-state in Europe whose property prices increased by more than 100% in an indiscriminate manner, irrespective of the geographic location of the property in the span of five years.
“Property is the main asset of Maltese households. Which means that if the property market tanks, the impact is not, as some commentators argue, mostly felt by property developers. The impact falls hardest on average Maltese families. From just that initial drop the average Maltese family would have had a fall in its net wealth equivalent to €8,800, wiping away two years’ worth of its previous savings.”
Look, this is no different from anywhere else in the world. The most basic and common asset which ordinary people aspire to and is most commonly held is a home. Well, simply because people need to live somewhere.
Now, theoretically, property prices going up would be healthy if it is matched by wage and salary increase but this has not been the case under the Labour administration. During the same span of time that the value of property exploded by more than 100%, salaries only increased by 20%. The result of this gap is the increasing exclusion of new entrants in the market and this is increasingly being felt by the younger generations. But there is also an obvious point based on simple mathematics which makes the argument above rather insipidly simplistic. The property market in Malta could only explode in value given the serious lack of supply of land which could be used to supply extensive market demand. The supply is only being increased by taking up more ODZ land and increasing building heights. So, it is true, that families who own a property, but especially land, have the guarantee of an appreciating asset, but for what goal or end? Supply is already constrained enough that selling your property to buy another one will guarantee you to get a bad deal. Most of the high quality-properties are taken and are not up for sale unless it’s for a huge premium. New apartment buildings are overly-expensive and of horrible quality with no insulation properties. Bad and ugly buildings lower the quality of life not to mention the lack of proper development policies which is constantly reducing public spaces in exchange of cars and buildings.
“Besides, as pointed out by innumerable IMF and rating agency reports, a house price shock in Malta, given the concentration of mortgages in banks’ loan book, would have strong impacts on banks.”
Sure, but we don’t need the IMF to tell us this. It has been like this for at least since the 1960s. Local banks are overly-dependent on the property market and that is not a good thing. It is also a sign of great stagnation in our local banking sector, a lack of diversification and a lack of innovation. As Bank of Valletta starts transacting US Dollars through Western Union, our banking sector is beginning to look more like that of a banana republic than something on which our future can rely upon.
“The latter would need to increase their provisions, to make up for the falling value of their collateral and heightened risks, cutting off their supply of credit to the economy.”
Please, explain why this would be a bad thing. Underlying this bizarre concern is the risky mentality to over-leverage oneself with various lines of credit to pay for construction sprees. Is this how we want our economy to grow? Back to the 1960s it seems. Let’s take on mountains of debt to build the hell out of the country then. The Ministry of the Economy should change into the Ministry of Construction and Concrete Development.
“In April 2020, the total amount of loans granted by local banks fell by €40 million. This decline in credit would transmit the impact of falling house prices to other economic sectors, which would be drained of the finance they need to operate.”
It’s the other way round. The author keeps harping about the gloom and doom which will befall us in case the over-leveraged construction bonanza gets a hold of itself. The construction industry comprises 5% of GDP (while real-estate is another 5%) and it is only fueled by the multiplier-effect of other industries mainly financial services, online gambling and tourism. It’s not the construction industry pulling the economy, it’s the economy pulling the construction industry with it. Look, it’s very simple. People need jobs to get mortgages and pay for their property and most people don’t work in the construction industry, get it?
This is not to dismiss the importance of the construction industry but keep in mind that political parties give excessive importance to this industry because it is their biggest donor.
“Government, beset with so many challenges, may have been tempted to look aside and concentrate on other issues. This is, after all, what the government had done in the 2008 financial crisis. In the second quarter of 2008 Maltese house prices fell by 4.1%. No policy action was taken. Banks started to tighten credit, as the ratio of non-performing loans doubled. The number of permits issued halved almost immediately. The impact was not fleeting. Official data indicates that even in 2012, the volume of property transactions was still a quarter below that in 2008. The house price correction of 2008 was undoubtedly one of the prime causes of the lackluster performance of the Maltese economy in subsequent years.”
Surprise, surprise, all other economic sectors were also doing badly especially tourism. Here the article fails to mention various important things. Since Malta had joined the European Union the value of property had already increased exponentially but it was still relatively affordable to the huge majority of Maltese income-earners.
“Reflecting this consideration, the current administration undertook several actions to sustain the property market. The first crucial measure was to introduce a moratorium on existing loans. This meant that banks had to give a temporary holiday for borrowers who were affected by the crisis. By end July a tenth of all households with a mortgage, around 7,400 families, were benefitting. Instead of facing financial problems, that in a worst-case scenario could have led them to face a foreclosure and have to sell their property, these families went on with their lives.”
Keep in mind that this scheme enabled people to delay their mortgage payments on the condition that their delays would be charged with interest. It was basically emergency relief at a cost paid back later. The solutions to our incoming housing crisis go beyond measures of social-relief on a profit-basis.
“Government was not content with stopping the market from dropping. In June, policy turned on the offensive. Announcing an unexpected temporary cut in stamp duty, Government provided an incentive for those households with ample liquidity to use this to go up the property ladder. The measure has been incredibly successful. Instead of continuing to fall by half, property sales went back to their previous level and then started to improve. “
The exemption from the stamp-duty aided first-time buyers but it’s not the variable which would make people buy or sell property, neither is it a variable which will enable banks to make their final decisions on whether to issue a loan or not. This measure would become irrelevant if the government opted to transfer dead-capital from the our stagnant banks and the over-heating construction industry to our consumption economy by a multi-pronged development strategy which would include lower interest rates for first-time home buyers (other European countries are offering 1% loans for property purchases of first-time buyers), cutting down the over-leverage in the construction industry, adding supply to the market and introducing proper development policies once and for all.
“The “usual suspects” will argue that this is another case of the Government jumping in to save its developer buddies. The reality is that this measure was a godsend for Middle Class families. Instead of worrying like in 2008 about falling property values and bank restraint on credit, this time round, the situation is completely different.”
I don’t know who the usual suspects are. Last time I read the press, very few wrote on this subject with a critical lens with James Debono being one of the only ones whom I can remember. Surely, the reference here is not aimed at the Nationalist Party given it is in full agreement with the Labour Party on the construction industry. On the other hand, I’m only a Labour Party member and surely don’t have as much as influence as the usual suspects who are funding the Party and dictating its policy over the construction industry.