The economics of house refurbishing

One of the impacts of the economic slowdown that we are experiencing in Malta has been the significant drop in activity in the construction sector.

This is not unique to Malta as the downturn even in the most developed economies started to be felt first in this area. One of the yardsticks that are used abroad to determine whether we are moving out of the recession or not is the number of what are termed as "house starts", that is the number of dwellings that have started being built. Another interesting example to take is Cyprus where the government has spent tens of millions to stimulate activity in the construction sector.

In Malta we have always looked at house construction as a social issue, rather than an economic one. This is understandable as successive governments have promoted a home ownership policy, while up to just a few years ago we had a department within the Public Service structures, called the Department of Social Housing. The Housing Authority has over a number of years assisted families in need to own their own home and there were also instances where housing was assigned to a ministerial portfolio. Over the last five decades, that is since the beginning of the 1960s, home ownership increased by several hundredfold.

Obviously, the development of home ownership and the increase in the population has benefited the economy greatly, but it does not seem that this was part of the intentions of the policy makers. The situation today is such where a number of the houses built or bought for use by their owners as their own residence, are becoming empty. A walk along a number of streets in several town and village centres will demonstrate how true this is. Anecdotal evidence suggests that there are streets where not more than a third of dwellings are occupied, because the original owners have since died and the inheritors have not sold these properties.

Environmental issues, overdevelopment, changing social habits, changing size of family and other aspects militate against a policy similar to what we had in the early 1980's, when large parcels of land were given out at very cheap prices for house building. For those too young to remember, it is worth noting that a town like Pembroke developed at that time as a result of this policy. Instead I believe that for economic reasons, we need to look seriously at policies that incentivise house refurbishment.

I am not after the pulling down of dwellings to replace them by apartments, but rather a situation where it starts to make sense for vacant dwellings in town and village centre to be refurbished and start being used again. And all for economic reasons rather than social ones.

What does the economy have to do with house refurbishing? Starting from a simple basic fact of economics, one immediately recognises its relevance. A vacant dwelling is a waste of resources. Therefore any policy that reduces the number of vacant dwellings must mean a more efficient use of resources. House refurbishment would use less of our scarce stone resources and would not take up additional space. This must also mean a more efficient use of resources.

In house refurbishment one would tend to make use of services, such as tile laying, plastering and painting, that are more likely to be provided by Maltese rather than non-Maltese. Thus there is less of a leakage from the Maltese economy. Once a property is refurbished, it is likely that its value in the market would increase and so its owners would be in a position to realise a capital gain and the wealth effect of house ownership takes a concrete form. The consequence would be a higher level of disposable income, which is also positive for the economy.

We require, however, to address some bureaucratic issues. The Malta Environment and Planning Authority needs to find a way that would speed up the process for the approval of such refurbishment works. I refuse to get into a discussion about Mepa and the way it operates. Equally I refuse to get into a discussion as to whether the various stakeholders of Mepa are actually hindering or helping Mepa's operation. On the other hand I also appreciate that there need to be specific rules as to how such refurbishment works need to be undertaken. It is possible to have very specific parameters while at the same time make the approval process more efficient.

Another issue that needs to be addressed is that of the wardens. Since most of these vacant dwellings are in town and village centres, there may currently exist the requirement to call in a warden to regulate traffic until the supplies for such refurbishment works are delivered. This increases costs and could also be making it ever more difficult for such works to be actually carried out. There could be other similar such bureaucratic hassles.

I do believe that we cannot just throw away regulatory processes for the sake of the economy. However, I also believe that any decision taken within the structures of the public sector has an economic dimension. And this economic dimension can never be ignored. I believe that policies that incentivise house refurbishment could have a positive multiplier effect as much as the construction of one or more big complexes. Moreover this benefit would be obtained without ruining further the environment.