Malta’s property market is often described as non-transparent by international financial investors.
The main reason is that both the movements in prices in the sale of property and the cost of renting are based on defective indexes.
A recent annual rent survey conducted by the National Statistics Office as part of a wider programme used by the European Union to adjust salaries of staff in its institutions indicated that the rental market in Malta is burgeoning at a rate that is much higher than that of general inflation. According to the NSO study, rental costs for a two-bedroomed flat went up 29 per cent between 2012 and 2015.
Such massive increases in the cost of rented accommodation has widespread economic and social implications that need to be fully understood if policymakers are to come up with the right strategies that promote economic and social well-being. There are different interpretations why the rental market is overshooting the general inflation forecasts, even if most would agree that rents are indeed rising at unsustainable high rates.
The easiest, if not necessarily the most accurate explanation, is that this increase is the result of the dynamics between supply and demand. Malta’s economy has been growing at a fast rate in the last few years mainly as a result of booming service industries like electronic gaming and financial services that are supported by increasing employment of staff, especially from overseas.
Local investors who love holding their wealth in the form of real estate are often helped by their bankers to develop buy-to-let properties that, in most cases, give a much better return than holding cash in a bank account which today pays historically low interest rates. The success of these investors encourages others to dip their feet in the property market.
As long as demand keeps growing the market will continue to boom.
But Sandro Chetcuti, the president of the Malta Developers’ Association, has another explanation for the fast rising rental rates. He asserts that tax evasion kept rent prices artificially low in the past and that the hefty increases over the past two years is a result of the market catching up with the realities of a booming economy.
There is little doubt that Malta’s shadow economy, where so many economic operators get away with substantial tax evasion, shows no sign of abating. According to the Department of Economics of the Johaness Kepler University of Linz, in Austria, the size of Malta’s shadow economy in 2015 was equivalent to 24.3 per cent of GDP – higher than that of Greece, Italy and Spain as well as the EU average of 18 per cent. So it is not surprising that Mr Chetcuti claims that abuse in the rental market was rampant.
It is no wonder that the anti-poverty campaign group Alleanza Kontra l-Faqar is crying for action. When an economy is booming it is the right time for the government to tackle the abuse of tax evasion that penalises most the weakest in our society. Low-income workers, whether employed in the official or the shadow economy, often do not afford the inflated cost of buying or renting their homes. Society suffers in the long term if such a phenomenon persists.
Social policymakers need to cater for the needs of the genuinely poor by supporting social housing initiatives. It is the duty of economic policymakers, together with the banks, to prevent a property bubble built on unsustainable growth in demand becoming too hot to handle.