Labour's Lm7,300 caper

The M.L.P. propaganda machine has been making much of the party's latest propaganda ploy: helping first-time buyers by subsidising their bank loans and giving them a Lm5,000 government loan to help them bridge an implicit gap between what they can afford and what the bank can lend them.

Labour adds the interest that young couples will be saving by their proposal and trumpets the 'fact' that it will be giving away Lm7,300 to every first-time house buyer.

Essentially, this is a populist move, intended to attract young people to vote Labour. But, in fact, it is devoid of any real economic substance and has probably not been thought out properly, as eventually it will prove to be inflationary as far as property prices are concerned, and hence counterproductive.

There is nothing basically wrong in helping young couples acquire their own home by subsidising part of the interest on their bank home loan - a line of action that the present administration is also set to follow.

The problem begins when this is not subject to a means test and the state starts 'helping' those who do not really need any help: this is more of the same short-sighted way most of our housing policies have been going during the past 50 years under different administrations.

Subsidising the bank loan of people who can do it on their own can only lead to one thing: enticing these people to go in for a bigger bank loan by buying a more expensive property than they would have otherwise bought.

The inflationary effect of such an incentive is obvious. The market for Lm48,000 units will move into that of Lm53,000 units... and developers will just raise their prices for the same thing.

Labour should make it clear that it believes that the state should only help those who really need help and not every Tom, Dick and Harry. But, of course, being so close to the elections, Labour keeps this card close to its chest, giving the impression that this help will not be subject to a means test.

The proposed Lm5,000 loan gives rise to even more serious economic concern. Obviously, a developer selling a unit for Lm50,000 who knows that the state will be loaning Lm5,000 to the prospective buyers will jack up his price by Lm5,000 to Lm55,000.

The Lm50,000 limit of the scheme will, in any case, be easily circumvented via the much popular practice of under-declaring the real selling price. This is very similar to what happened when interest rates came down: property prices went up because buyers could afford a bigger mortgage.

The effect of this proposal will be that the Lm5,000 will not be a subsidy for hard-pressed couples but a subsidy for developers.

Secondly, according to what Labour is saying, the Lm5,000 loan from the government will be repaid with interest on the eventual sale of the property by the couple. What happens when a couple arrive at the point where they can well afford to repay their Lm5,000 but know that investing their Lm5,000 is more lucrative than paying Government back?

The answer is obvious: the couple will start using what once was a home loan as a starting capital for investment! Apart from the potential for much abuse, the couple will view the Lm5,000 plus interest not as a loan to be repaid but as a tax on the sale of their property since it is a repayment they will not incur if they do not sell.

And the longer they live in their property, the higher this tax will be because of the effect of accrued interest.

What might happen in such circumstances? There will be couples who won't sell and will stay put in their property, even though in other circumstances they might sell to buy a new property according to new needs.

This will reduce that part of supply that nowadays comes from middle-aged couples who are selling their larger properties to move into smaller units. When supply decreases, prices increase, as Adam Smith found out more than two centuries ago.

Moreover, a couple selling their property will first calculate how much they want for it and then add to that figure the amount of money that they have to give back to the state. They will not think that their property is worth 'x' of which 'y' will go to the state for repayment of loan, but they will think: we want 'x' for our property and so we will ask for 'x' +'y'!

Can there be any doubt that, in the long term, Labour's proposal will have an inflationary effect on property prices?

There are other considerations. One cannot expect this state loan to start being repaid before at the earliest 10 years after the scheme is introduced. So for the first few years, this will surely be a one-way monetary stream from state coffers.

Consider that at least 1,000 couples get married every year, apart from people who set up on their own or separate residence. This means that government expenditure on this new scheme will be in the region of Lm5 million a year: a figure that will start decreasing after perhaps the tenth year, and will only be self-financing after 25 or 30 years.

By the tenth year, Government would have had to find some Lm50 million to finance this subsidy. This is no mean sum. And subsidies - like drugs - are addictive: people will always want a bigger dose to get the same fix! In no time, we will have politicians competing to increase the state loan to Lm7,000 or Lm10,000.

It is a widely accepted fact that in Malta too much money is invested in property. Private money has been going into 'speculative investment' in property that produces nothing rather than into 'productive investment' that creates real, long-term jobs and earnings for the country through exports.

In this situation, what the country does not need is even more money going into speculative investment, this time induced by government intervention using money collected from taxation rather than through the free market.

In their pursuit of power for power's sake, Labour has come up with a proposal that has a long-term inflationary effect and is tantamount to an indirect subsidy for developers.

It will take quite some time for people to realise the really negative effect of this proposal - the same way it is only now that we realise how bad another popular housing policy of the past was: that of the state giving away building plots for practically nothing.

But Alfred Sant's present priority is making sure that his party wins the election. The long-term economic effects of his proposal are of no consequence - to him at the moment.

micfal@maltanet.net