The Pandora’s Box of the property industry

The mere mention of the state of the property market is enough to send blood racing in the veins of those who have some interest in this industry. There are few sectors of the economy that provoke more passionate or controversial opinions by different stakeholders than the property industry and the direction it is taking.

When a breakfast meeting organised by the Malta Developers Association discussed the question of “where is the property industry going” it was like opening a Pandora’s Box of an industry that many believe is now declining fast. Views were generally polarised, the logic used was at times arguably warped and consensus on the way ahead seemed unachievable.

Developers and estate agents blame the government for not doing enough to promote the sale of property both to locals and foreigners. They maintain that with 53,000 vacant properties (some say the figure is now nearer 70,000) the government should have come up with a more generous permanent residents scheme to entice foreigners to buy property in Malta. The Finance Minister again argued that the scope of this scheme was not primarily to send a lifeboat to the struggling property market but to attract really high net-worth individuals to actually live in Malta and spend substantial amounts of money here.

The head of the Malta Chamber of Commerce, Enterprise and Industry tried to make the business case for more government assistance to the industry by saying that unsold vacant property in Malta was estimated to be worth €7 billion. If such property was sold, the economy would be flooded with so much “investment” it could result in a yearly income of €350 million or seven per cent of GDP.

Economists are likely to react badly, deeming such talk as warped logic. The more sceptical analysts would argue that, even if this assumption indeed became reality, the result would be that more buildings would rise as property investment would increasingly be considered as risk-free. In the past, money flowed in the property industry because many Maltese, and not just developers, believed that investing in the industry is risk-free and inflation proof.

The Finance Minister, like many objective observers, does not subscribe to this risky theory that prevailed until recently in countries like Ireland. Buying property can indeed be a good investment if done diligently but it certainly is not risk-free. In fact, as rightly pointed out by the minister, the risk becomes even bigger if the property one buys is “simply not up to scratch”. Investing in such property is not unlike going for high-risk junk bonds that may promise an above-average return but often fail to repay the capital in full.

Another controversial issue that was raised at the breakfast meeting was the question of official valuations made by government-appointed architects whenever a property is sold. Those involved in selling property argue that the system is unfair because it is arbitrary. They also implied that when such architects value the property at a higher level than the declared selling price, this is done to justify a stealth tax.

The issue of tax evasion must rightly be addressed if this country wants to underpin the sustainability of its public finances through the enforcement of fiscal morality.

The way ahead for the property market is surely one that is based on sustainable development that could include the rehabilitation of dilapidated buildings in village cores and not on expensive state support.