For the past five years Malta experienced a sustained high economic growth which has no parallel in its economic history. Inevitably, prices in boom periods rise as this is surely an indicator of a flourishing economy.  Although the general price level has been successfully contained, on a sectoral basis, in the short term property prices and rents have consistently increased due to the prevailing market forces.

The supply of accommodation has not matched the rate of increase in demand, although in the long run the market is expected to address the imbalance without the need of government intervention.

Nevertheless, the existing market conditions have some serious ramifications for affordable housing and the demand for social housing assistance. Notwithstanding the short-term nature of the housing problem, policy measures have to be taken now in order that the current housing stress will not turn into a housing crisis in the future. It is important to alleviate the burden of those experiencing difficulties in finding affordable housing.

Policy initiatives announced in the last Budget go some way in addressing these concerns. The most important measures include social loans, urban regeneration, housing construction, rental schemes in conjunction with the private sector and targeted actions such as incentives that entice aged tenants to return government-owned property when they enter retirement homes.

This Budget has furthermore engaged in policy measures aimed at distributing income in favour of the lower income groups and consequentially mitigates in part the quandary of affordable housing. The preparation of a White Paper on rental property is a welcome endeavour in that it should clarify the issues underlying the problem and promote suitable solutions. The Housing Authority is also formulating its own proposals grounded in a profiling study which it is presently conducting.

While the demand for housing is persistently rising, especially in the face of foreign workers which has risen from 13,121 (2012) to 36,651 (2016), the supply of housing stock was inelastic in response to demand.  The chart with this article gives an indication of the trend in the supply of new property between 2013 and 2016. It is apparent that development was slow to pick up in response to this increase in demand.

Rent regulation can help in avoiding a jungle situation in the housing market

Any significant imbalance in the housing market conditions will have a spillover effect on the demand for social housing assistance. So far, there is clearly no evidence of a crisis in social housing, according to Housing Authority statistics. For example, the waiting list as at end of 2016 was approximately at the same level of that of 2008. In the in-between period, demand was always below the 2008 and 2016 figures, with peaks showing around election years.

Although the statistics do not indicate a crisis situation, there are enough warning signs that demonstrate a need for seriously mitigating some issues now to avoid an emergency in the near future. One area that definitely needs improvement is the provision of new apartments. In the last 10 years the Housing Authority has only managed to provide approximately 150 units per annum. The target now should be that of at least double this supply stream in order effectively reduce the waiting list.

As Paul Krugman wrote in The New York Times in 2000, rent control is “among the best-understood issues in all of economics, and – among economists, anyway – one of the least controversial”. Economists believe that rent controls result in a reduction in the supply of apartments and a fall in their quality. Rents below the market encourage tenants to hold on to an apartment even if they do not need it anymore. In other words, rent controls are a classical example of resource misallocation with all its negative social and economic ramifications.

In spite of their good intentions, some are still erroneously persisting in advocating maximum rent controls. Others go even further in concocting housing price indices on the basis of which they suggest regulating rent according to the locality. Such policies would only aggravate matters and create market distortions to which landlords and developers know very well how to adapt. For example, landlords would be inclined to abandon the upkeep of apartments situated in the south but to properly maintain apartments in the north.

While rent controls are not necessarily the best way to deal with rising rents, rent regulation can help in avoiding a jungle situation in the housing market where rental contracts are often the subject of abuse by both landlords and tenants.

The question of affordable housing has also to be analysed within the context of the fact that nearly 78 per cent of Maltese residents are home owners.  Thus, the majority are somewhat buffered against rent increases, though not against negative changes in mortgage terms. This vindicates the government’s policy in incentivising people to own their own house through various home ownership schemes.

One also notes that 19 per cent of Maltese citizens are in subsidised rented property or have free accommodation. Only around three per cent are renting at market rates. Foreign workers are in this category.  These are the people most likely to bear the burden of the significant increases in rental accommodation. It is only right for the government to be targeting assistance to those in this category that deserve taxpayer support.

Stephen McCarthy is the CEO of the Housing Authority.