Which way then for the property market in Malta?

Next year’s euro changeover will have seen a wall of liri coming out from under the mattresses (perhaps literally) looking for a home (pun unintended) and fuelling inflation.

In the short and maybe medium term, the situation in Malta will continue much as today with inflated values until the economic cycle downturns – as it always does eventually – and impacts on the property market, probably dramatically. The worst case scenario would see unemployment impacting on people and buying a house will become the least of their priorities. In that event, it is to be hoped that the Maltese banks will not find themselves overexposed to real estate, as the Japanese banks were in the 1990s.

As large projects bring volumes of new quality units to the market, their company sponsors will have compelling reasons to sell. And they will – with imaginative bank-backed financing inducements, if necessary. That should concern investors holding overpriced inferior property, who will then find out about the stickiness of a highly illiquid asset.

Property markets racing ahead of the economy have a social impact on lower income groups and, more often than not, end in crashes. Both are undesirable outcomes to be mitigated, though always best avoided. The Malta property market is in an unbalanced state, with a quarter or so of housing stock empty – and with more in the pipeline – and its continuing inflation, which is an aberration. The UK’s overheating housing market, due to housing shortages, has driven the Bank of England to keep increasing its interest rate since August – with a high probability of more to come – with the objective of avoiding a crash and achieving a soft landing. Malta is different, with no shortage of empty houses for sale or let, but is it so different that the risk of a crash can be ignored?

The lags inherent in the dynamics of property markets usually require demand and supply-side anticipatory interventions to avoid runaway inflation or achieve a controlled slowdown – buying time – while the rest of the economy catches up, namely wages and salaries. The timing of announcements and lead-time to implementation are crucial for their effectiveness.



What can be done at this late stage to restore the equilibrium?

The Housing Authority shared equity house-buying scheme had its forerunner in London. Another leaf out of that city’s book would be for project approvals to stipulate that at least one-fifth of unit completions should include affordable housing for low-paid essential public service workers, like nurses.

The contract purchase price must be the basis for calculating property transfer tax. Currently, this charge is a known unknown that can be of critical budgeting importance to potential buyers. The government official’s valuation usually lags behind by months. Whenever markets turn, there is a risk of this process creating anomalies like those 1939 Rent Laws which outlived their usefulness long ago – another case of The Law of Unintended Consequences.

A healthy property market needs the sustenance of first-time buyers as they enable existing owner-occupiers to move on and up, or downsize in later life. The current stamp duty on the first Lm30,000 (or a few thousands more) should be nil for first-time buyers on properties up to that purchase price. That threshold would act as a brake on lower quartile property sector inflation.

Supply-side investors should be spurred to release their housing stock on to the market. Given their seeming immunity to the bank rate lever – control of which anyway passes to the ECB on entry to the eurozone – a mild version of some European countries’ wealth tax is proposed.

An annual Property Wealth Tax should be charged on the value of property holdings, though exempting one’s declared primary residence and, in fairness, excluding all properties subject to the 1939 Rent Laws. The PWT rate should be initially set at a quarter to half per cent of chargeable property sufficient to offset the above foregone stamp duty revenue. The gifting of properties should incur transfer tax at the government architect’s market value, which would be a valid exercise in the absence of a sale transaction. Shells should be included and market valued by the government architect as if finished – to induce eradication of these eyesores on Malta’s streetscapes. There should be good notice of implementation, say in 2009, for investors to rebalance their investment portfolios. PWT revenue could accrue to councils to improve the same area of collection.

The idea of a wealth tax will provoke shock and horror in some quarters and it would require political courage to enact. However, those investor funds tied up in non-productive vacant property are better utilised if reinvested – with personal tax incentives if needed – in ventures of added-value services and goods.

The above measures might reverse the growing risk of a crash and bring Malta’s residential property market back on the glide path for a soft

landing.

Meanwhile, those who will not rent and prefer to buy a house should, above all, regard it as a home and maybe an investment. Investors should be aware that – after a good 20-year run and given the existing oversupply – the downside risk far exceeds the upside.



Alex P. Galea was a Citibank senior vice-president.

He is now retired.

Part I was carried last Wednesday