The property market dilemma

The property market is once again in the news – once again for the wrong reasons. This time, various interested parties are expressing concern about the state of this market and requesting special treatment in the form of fiscal incentives to help it get out of the present slump.

The GRTU has made very clear recommendations for government intervention to revive this sector. This appeal has also been echoed by some politicians who know that this particular sector is suffering more than others, even if statistics may not be showing the full extent of this problem. Some analysts believe that, if the property market continues to slide, there may even be a risk to those banks that have large exposures in this sector.

The local property market is the victim of its own perceived success. It continues to be plagued by endemic problems relating to practices that should have been eradicated in the process of modernising our economy. This is easier said than done because many of these problems have deep roots in our business culture.

For instance, this market still lacks transparency despite some clear attempts to eradicate this problem by changes in the way property sales are taxed. It is not easy to understand the extent of price movements in this market. The statistics that are produced by such bodies like the Central Bank and the estate agents themselves have serious limitations and are often contradictory. This makes it difficult to gauge the extent of the current crisis in this market.

Many of the problems facing this sector are the direct result of lax lending practices in the last decade. Banks increasingly looked at financing property development projects in the absence of more lucrative opportunities in the tourism and manufacturing sectors. The chickens are now coming home to roost. Moreover, our planning authorities up to some months ago never seemed to see a problem in issuing even more permits for new residential buildings in every corner of the island.

We now have a massive oversupply of residential and even commercial properties, some of which are not even completed and serving only as an eyesore in various locations in Malta and Gozo. Some developers, who have been used to making a 35 per cent profit, and even more, on the cost of developing property, are now faced with prospects of no profit, or even a small loss, on their sales.

Large developers try to calm the nerves of their bankers by offering additional security in order to be given more time to repay their loans. Such developers prefer to withdraw from the market for a time and wait for a surge in demand, rather than sell on what they perceive to be a low price.

The mortgage market is also intrinsically connected with the property development market. But performance of the mortgage sector is undoubtedly less worrying. As long as unemployment does not surge, people will continue to repay their loans even if it means working for 60 hours a week to do so. Some of these mortgages were granted to people who could not afford to pay them.

I do not believe that the property market is about to crash. But it will certainly continue to languish in a long protracted slowdown. I am also not convinced that the government should introduce any extraordinary fiscal measures to ease the pressures on property developers and the bankers who financed them. Banks can easily tap the equity or bond markets if they need additional capital to strengthen their balance sheets. Developers can fork out some of their past profits wherever they are parked.

Should the situation deteriorate, any fiscal measures considered by the government to rescue those involved in this industry need to be coupled with the introduction of a windfall tax on extraordinary profits. Those who rake in massive profits when the going is good should not mind paying some money back to ease taxpayers that came to their rescue when the going was tough.

Perhaps more fiscally moral, any incentives should be directed to first-time buyers to help them get their feet on the property ladder – something that many still find very hard to do today as a result of recent excessive property price inflation.

So, the interest of taxpayers should be the compass that directs the actions of the government if and when it faces the property market slump dilemma.

jcassarwhite@yahoo.com