The scent of reform

It was sheer delight to read Jimmy Magro's "Rent reform through social justice" (The Sunday Times, August 24). Jimmy comes through as a far-sighted and courageous politician capable of having ideas of his own, capable of recognising a national challenge and of shedding clichés in addressing it.

Of course rent reform through social justice. Of all the people who have spoken to me throughout Alternattiva Demokratika's strenuous efforts to place the issue back on the country's political agenda, none have even hinted at any reform that would make things worse for society's weaker members. The Green Party's stance is clearly in favour of a socially just reform. So is the Nationalist Party. The Malta Labour Party's co-operation closes the door on any remaining concerns on that score.

It is superb that we all agree. It is even better that we are all talking about the issue at last. At last we have some evidence of responsible politics. As with many other urgent, far-reaching, national challenges, the government is impotent without opposition co-operation. Both bear responsibility for decision by default when nothing gets done. Too often they cancel each other out in zero sum politics and we all end up with a minus result as the situation deteriorates.

At long last Mr Magro has sidestepped the stereotype and freed us all from the trap, at least on the rent issue. There is a real hope that something can and will be done in real time. It is a momentous sign of change that is more than encouraging. It gives us all something to celebrate. Thank you, Jimmy.

In egging on the other parties AD avoided drawing up a blueprint for reform. We wanted a tripartite, all-stakeholder discussion to start; we wanted to avoid a negative reaction to any pre-condition our plan might set to possible reforms.

Mr Magro has his own ideas and sets them out in some detail. We won't hold it against him. Many of them are acceptable at first glance. He won't hold it against anyone if a refinement is proposed to some others.

The heart of the matter has been grasped: no reform will succeed without a general consensus that gives everybody confidence that reforms are not reversible. The people need a plan they can rely on and no one side can give it to them.

It is also clear to everyone that the facts and figures must be known before radical reforms can be taken in hand. Nobody wants to create new social problems while tackling old ones. Policymakers need to know the present situation and in detail before they can discuss options.

How to collect data is a challenge in itself. The 1995 census data are an indication but does not furnish sufficient details to permit an accurate assessment of the various categories of rented properties regulated by the various legal regimes created by layer on layer of legal patch-up jobs cobbled together over the years. If we all want to get there, nothing can stop us.

At this point we should make it clear why a reform is needed. Mr Magro mentions the injustice to owners of controlled rented property. There can be no discussion about this. Many landlords have sustained the welfare system in the housing sector for half a century and more.

Many of them sustained tenants who were much better off than themselves. Many tenants enjoyed "social benefits" to which they had no claim whatsoever at the expense of private persons, sometimes for generations. If ever it was justified to rob the rich and the poor indiscriminately to help the poor and the rich with equal injustice, it is clear today that distinctions must be made. Nobody should be robbed.

Social justice with landlords or tenants is not the only reason for reform. It is clear to us all that the present situation of a national average of 23 per cent vacant housing stock is unsustainable. Governments have plodded on with the resigned blindness of waterwheel mules ignoring the damage and the danger.

We continue to gobble up the countryside while our inner cities and village cores crumble. An incredible 90 per cent of our waste is generated from construction and demolition. The need for a rational use of our resources screams at us from every street corner.

This is an economic issue, an environmental issue and a social issue rolled into one. There is no rich and poor divide here. It's a common cause. If we lose, we all lose; if we win, we all win. We have been on a losing streak for 50 years and we have lost more than our ancestors ever lost in the previous 5,000 years. The damage done is incalculable.

The danger is unknown but awesome. It makes no economic sense that property prices keep rising, now on an upward curve, when so many properties lie vacant. The property market in Malta is unreal.

It is not enough to point to the scarcity of land to explain it. The vacancy rate (23 per cent in Malta, 39 per cent in Gozo) tells us that something is very seriously wrong.

It is clear to us all that property prices have become detached from the underlying reality of our earnings. It is a situation of hoarding in a time of plenty. If we don't get the price we hope for, we hang on to the property until we do. We think that we can afford it because prices always rise.

In the market's memory it has always been so and we are led to believe that nothing will ever change this. Prices rise fast enough to compensate for loss of interest on capital. Our minds are at rest. It's a dangerous illusion sustained by a distorting legal regime. No government can disort the market for ever.

The idea that commercial rents would be unaffordable or unattractive because purchase would make better sense is based on the fact that property prices are detached from earning ability. Tax incentives to landlords and tenants can make rental attractive and flatten out the property price graph. Government must convince the country that it will bend over backwards to close the gap and end the distortion.

The longer the distortion lasts the worse the fallout. If government waits for the bubble to burst it may have engineered a financial cataclysm, not only for families in rented accommodation but for all others also. Bubbles like ours have burst in Japan, the US, the UK. Why should Malta be exempt?

A carefully calibrated rent reform can allow policymakers a safety valve. Cunningly devised it can permit an easing of pressure on the property market by providing a viable alternative to ownership. It can, maybe.

Mr Magro is right to point out that cultural conditioning is a key issue to the effectiveness of rent law reforms. If the significance of the issue is recognised, if we are aware of the difficulty posed by a contrary culture, we have no choice but to attempt to engineer a culture change.

It has been done before, inadvertently perhaps but with astounding effect nonetheless. Why should it not be possible when the engineering is deliberate? In the past 30 years the ratio of tenants to homeowners has been dramatically reversed. The catalyst was the availability of accessible home loans.

Only 14 per cent of homes are owned subject to a mortgage, yet the combination of cheap land provided by Government and the introduction of the mortgage system triggered off a copycat mechanism that drove most of us to opt for home ownership at whatever cost to our quality of life. If two jobs are not enough, we make it three or four per couple.

Is the process irreversible? Should it be reversed? Can it be slowed down? Can it be redirected? Do we want to try? Does the existence of a culture necessarily constrain policymakers to continue to encourage it?

The return of Lm900 million of expatriated funds is credited with the recent rise in property prices. It's great that the money is back. It's a disaster that property ownership is seen as the only form of investment. Property, particularly home ownership is a wealth sink. The higher prices rise the more capital properties absorb.

The entrepreneurs who have it right are those who own property rented at commercial rates and live in controlled rented properties. Many leading Maltese businessmen wallow in this scandalous luxury. They pay peanuts to occupy their homes while they rake in further fortunes from the artifically restricted "free" rental market. The surplus is invested in their businesses or abroad. They're having it good.

The holiday should be ended for them but their example should show us the way. Sinking the country's wealth into property guards us from ever increasing prices and gives us the illusion of making a good investment. It is an ongoing disaster.

The economic growth generated by increasing property prices is unrelated to an increase of productivity, any growth of export capability or of foreign currency earnings of any kind. Malta is delirious in its own money myth. We are not really making our money work for us. We are earning millions and burying them.

If property earns us 10 per cent per annum through capital gain even when it is held vacant, we feel we have made a good investment. The banks can't match that with interest on deposits, nor can foreign stocks compete. We are right. As individuals in a property market persisting in its present distortion, we are right. As a country we are hopelessly wrong.

None of the foreign manufacturers who sell us everything we need gives a damn what we think our homes are worth. We have to pay in hard cash. We are turning the hard cash we earn to stone and imagine that we can continue to spend abroad without let or hindrance. For ever?

Rent reform is a key economic issue. Making sure that reform does not exacerbate the exisiting social housing challenge in the face of a shrinking welfare cake, is a major concern but certainly not the only one. It would be a sad mistake to address the rent issue only in a social housing key. It is a very much bigger issue, far beyond the urgent need to alleviate the burden on expropriated landlords. It is a matter of coming to grips with a cancer that has spread across our social, political and economic reality.

We need to do much more than find the money to take an X-ray of the property market. We need to devise systems to deflect the trajectory of the construction industry. We need to provide, and encourage forms of investment other than property. We need to kickstart a rental market that has almost rusted away. We have to make it an attractive option. We need to regenerate our inner cities and village cores. We need inspiration and enthusiasm. We need politicians with guts and brains.

The one step we can take immediately to give an unmistakable signal to the country is to end the automatic renewal of leases. Present tenants will remain assured of life tenure and their children until the age of 18, should their parents die before they attain majority. The release of properties onto the market would be dispersed and gradual. Tenants would be secure and landlords would have a real hope.

It would mean instant economic growth through the revaluation of 33,000 properties. Enterprising landlords can hope to use the properties as collateral and can be encouraged to invest in non-property ventures providing employment to others. Some may be able to provide for their old age by liquidating a tenanted property at a realistic price without burdening the welfare system.

Let's do it tomorrow and then put our heads together to address the massive challenges we face.

Dr Vassallo is chairman of Alternattiva Demokratika - the Green Party. www.alternattiva.org.mt