Editorial

The attachment to property ownership is embedded deep in the Maltese psyche in such a way that many are prepared to believe in economic fallacies that everywhere else are discarded as being illogical. One of these fallacies is that property in Malta is a risk free investment and that property prices will never come down.

The GRTU, like some estate agents previously, recently sounded the alarm about the prospects of the property market. They made some recommendations aimed at stimulating demand to avert the risk of a slump in this important sector of our economy. But a real understanding of the difficulties being faced by this industry cannot ignore the supply side of the equation. During the past several years the property industry in Malta has seen massive growth that was unmatched by any other sector of the economy. Banks applied very generous criteria for lending when their vaults were flush with money deposited by their customers and developers found credit readily available at very advantageous terms.

It seems that the managers of our economy saw nothing wrong with this. After all, the property industry has traditionally been one of the most effective motors of our economy. In fact in 2007 "real estate business activities" were the second main contributors to economic growth. But when supply exceeds demand, a shock is bound to affect the market, even if many prefer to live in denial of this basic principle of economics.

Such shocks are usually resolved by price corrections, or to put it more bluntly, a fall in prices. Price volatility is a characteristic of all free markets and there is no reason why the Maltese property market should be an exception.

Developers, and the large subcontracting industry that depends on them, would rather see measures to stimulate more growth, than suffer the pain of price reductions, as many other investors are doing at present in the equity and bond markets. Of course, a property crash is the last thing the Maltese economy needs. Just look at the example of Ireland that is going through a property slump that is dragging the Irish economy into a recession.

But stimulating even more demand can never be a proper solution. Tax incentives to encourage more investment in property is to be discouraged at a time when everyone is being made aware of the need to pay the real cost for the use of energy products and services. Investing in property, like any other investment, carries its risks and these risks should not be underwritten with taxpayer's money.

The case of those buying their first property to start a family is rather different. These people are not primarily investing in property with the aim of making a financial gain. They buy property to enable them to set up a new family unit. The social role of government in this area is not only desirable but mandatory.

But otherwise it is the market that needs to support property prices, and not some artificial measures that will save the pain of those who took the risk of building property in the hope of making good profits, only to cry out for government support when such profits fail to materialise.

Our politicians will no doubt continue with their search for the holy grail of economic diversification. The property industry will always be an important sector of our economic growth. But like other sectors it cannot be given preferential treatment that has to be funded directly, or indirectly, by taxpayers. In the present circumstances, it is far more economically efficient to provide the necessary infrastructure for other relatively new industries to grow and create employment opportunities for our people.