20 April 2014

Look After the property market

 - Monday, 31 October 2011, 00:00 , by Gavin Gulia

You will all understand that the property market and the construction industry are sectors that, like other business activities, employs and engages thousands of workers both directly and indirectly

To the untrained eye these sectors are the exclusive domain of property speculators who have been hiking prices artificially and beyond their real value over the last two decades. But in reality these sectors are of great interest to the general economy and provide the bread and butter of thousands of self-employed entrepreneurs such as plumbers, carpenters, ironmongers, tile layers, electricians, furniture manufacturers and many others.

These businessmen are comparable to those engaged in other sectors of the economy like tourism, manufacture, services and retail and they deserve the same attention. They do not necessarily just employ themselves as sole-traders but in turn provide work to their employees, if they are small and medium in size, and subcontract work to other service providers. Like in all other economic sectors when trade is low employment is bound to be negatively affected. It is therefore of paramount importance for the economy that all sectors - including the property market – are not affected by a slowdown and a downturn in sales.

And in as much as it is important that property prices do not spiral out of control, it is equally important, for the survival of the market, that prices do not fall dramatically.

There is this false perception that the more property prices fall the more they become affordable to the benefit of consumers and the market itself. Over the last two decades the market was characterised by unjustified speculation which doubtlessly made land and property very expensive assets. Ruthless speculation contributed to the famous property balloon where prices of land and homes in most cases reached levels beyond their true value. This was very wrong.

Unfortunately the Gonzi administration did not help the situation when on the eve of the last general elections, it decided to “rationalise” boundary schemes. Indeed the extention of development boundaries in 2006 registered the highest spike in prices ever. In June 2006, right after the parliamentary debate concerning the controversial extension of development zones, prices across the entire property spectrum shot up by a massive 32.17% over the same month in 2005 according to NSO statistics.

This resulted in an excess in supply of houses that are now still waiting for a buyer. But the size of the Maltese population is what it is while foreign investors have not arrived in the numbers hoped for and the new residence schemes are not affordable to third country nationals. This in my opinion is now exacerbating the problem for those who have invested in this sector and it can only lead to a decrease in employment, quite like what the construction sector is experiencing now.

Beyond the “correction” of artificially high pricing which could be currently taking place as I write because of the excessive supply of property currently dominating the market, it is still to be seen whether prices will stabilise appreciably or carry on with their downward trend. A scenario where property prices fall dramatically could negatively affect owners who have previously expended substantially to purchase their homes as they would see their biggest lifetime investment fall in value. I am sure household owners would not fancy a situation of negative equity where their children would inherit property at less than what its value was at the time it was purchased.

The current decrease in property prices is a correction of the excesses of the past and is most welcome. However one has to gauge what the situation would be in the months to come to determine what the net effect would be. It is hoped that properties will eventually reflect their real value as extremes on both ends of the price tag are bad.

Another recession is looming on the horizon and we should really be hoping that it will not have the collateral effect of dampening further consumption and expenditure. If demand is negatively affected, because consumers’ purchasing power dwindles, it will directly impact across the whole economic spectrum with the probability that property prices will carry on falling. That would also be very bad news for our conservative banks which have traditionally relied heavily on real estate collateral. Dramatic falls in property prices can potentially expose them to negative equity with the impossibility of recuperating loans in full or in part.

The next budget should therefore address this potential problem by creating the right fiscal incentives to stimulate growth in this sector. Government cannot afford to rely only on the financial services sector for economic growth because there is little benefit to the economy in real terms. This is why families cannot yet feel the growth in the economy experienced during the last two years.

There can be no doubt that too much taxation on the development and acquisition of property has become a burden and it is high time for changes.

Dr Gulia is the Opposition’s Main Spokesman for Tourism and Air Malta

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