Here’s some basic economics 101.
The reason why central banks increase interest rates during an inflationary environment is to reduce the money supply and decrease demand. In a recessionary environment, the central bank would be expected to reduce interest rates so as to increase the money supply and increase economic activity to push employment and prices up.
Financial assets do badly in a high inflationary environment, and in general, so does real estate, although in Malta, real estate is in a peculiar position given its relative and excessive demand. The real estate market in Malta is strong and although it experienced lower activity during these turbulent times, we didn’t see prices falling by any significant amount if at all. In the US, this time round, we’ve seen real estate prices holding strong and declining only slightly compared to previous market downturns during high inflation periods. In Malta, the situation is relatively worse with prices having moved barely if any at all. House prices in Malta are more than double what they were in 2013 but statistics show that Malta’s average salary has only grown by up to 25% in the same time frame. From an average salary of €1,600 in 2013, today’s average salary in Malta is up to €2,000, while some statistics even show it’s less. Anecdotally, locals will tell you that they have problems buying their first property and it’s probably the biggest problem for youth in Malta, today.
Prime Minister Robert Abela wants to solve the housing problem in Malta as he does with any other problem: throwing money at it. The government has recently, announced that it will be giving €10,000 to every first-time buyer (given in a ten-year period). After announcing the scheme, Robert Abela went on record telling the real estate and construction industries not to increase prices as a reaction to the scheme. So, Robert Abela is basically doing the opposite of what he should be doing to try to tame property prices and expressly expects that his scheme will not have its textbook effect on the market.
The only way to address the housing issue in Malta by containing prices is to aggressively address it via supply by simultaneously updating planning policies – this is not what Joseph Muscat did and neither is what the current government plans to do. Instead, Joseph Muscat appointed Robert Musumeci to draft Malta’s planning policies and the result was jungle rules with an anarchic construction industry building haphazardly in most places in any way the contractor wants. There are going to be no changes to Malta’s housing and planning policies under Labour, so the situation is only going to get worse, and it’s in Labour’s interest to keep the situation as it is given that conduction magnates have become the biggest party donors and they literally control the government’s policy over planning as a result.
The way Robert Abela wants to deal with the housing problem, that is by throwing a €10,000 cheque to first-time buyers, is the only way how problems can be solved. In reality, problems are multi-faceted and structural and supposedly, should be addressed in a multi-pronged manner. Robert Abela is unable to think about problems in the latter way. His Finance Minister who supposedly presents a smarter demeanor than his boss doesn’t seem to get it either. This is why for example, the government is currently a 55% premium on natural gas because last April it made a long-term purchase contract with price adjustments pegged to oil and not to gas – like buying life insurance for a dead body. In turn, the government pays subsidies to the consumers to offset the difference in price, yet Robert Abela delusionally propagates the idea of the government’s benevolence in issuing subsidies. The real story is that the government’s subsidies today are being given due to the government’s reckless incompetence. These problems will be repeated.
So, the real story behind Malta’s huge amount of debt incurred during Robert Abela’s rule is not only due to absolutely necessary subsidies needed to keep ordinary people afloat, but it’s also a story of massive incompetence and a lack of strategic thinking. It’s going to be more of the same under Labour so the government’s expenditure forecasts will keep being raised. The housing problem will only get worse and the jungle rules in the construction industry will remain prevalent. Labour’s economic policy is the perfect policy to expel the youth from the country and added to its authoritarianism, it empties society of its “intellectuals” – the perfect cocktail to stifle local innovation. Meanwhile, the government is adding ever more debt to address problems while structurally, the problems remain the same. It’s a cycle of doom very similar to a Greece 2.0.