Over the last couple of weeks, one of the items the media focused on was the significant (whatever definition one gives to the word ‘significant’) number of plans for high-rise buildings. My intention is not to focus on any particular plan. They are being put forward by investors risking their money, and they certainly know best how to make use of that money.
Some will create real value for the economy – for example, those that are linked to tourism. Others will create far less value – for example, those who are developing such buildings for speculative purposes.
One can also mention the social and environmental hazards of such high-rise buildings, especially since many are being concentrated in one area – Paceville/St Julian’s/Pembroke. Both types of hazards bring their own economic costs. That area, together with a number of others, has already been a permanent building site for around 20 years. I have actually experienced how the quality of life of residents of such areas has deteriorated because I live in one of them.
And what would happen if there were ever to be a crisis in these areas? There is only one exit out of Paceville and one doubts whether our Civil Protection Department is geared to deal with a crisis involving a high-rise building of 30 floors or more.
The significant increase in property prices over the last years has diverted economic resources. Investment has gone into property instead of other sectors that could provide our economy with better value
However, let us focus on the economic aspect of the issue. It is presumed that such high-rise buildings are being planned because there is a perceived demand for more residential and more office units. It could be a reflection of a perceived shortage today.
It could also be a case of perceived future shortage and, as such, developers are planning to increase supply in order to meet that possible future shortage.
Whichever way one looks at it, it is a case of the market mechanism operating to equate supply and demand.
So one may ask what economic risk could exist if the market mechanism were allowed to operate freely. Students of economics know that, at times, markets do not operate the way they should and fail. Market failure arises for a number of reasons such as when there is a misallocation of resources and suppliers seek to dominate the market; when markets are slow in reacting to a situation of disequilibrium; or when there are social costs.
If one were to analyse the situation, would one note the existence of any one of such elements in the market for property? I have already mentioned that there are social costs arising from such high-rise buildings.
Second, are suppliers dominating the market? I believe so. Proof of this is the fact that the cost of development of properties has not risen as much as the selling price of such properties, leading to what economists call supernormal profits.
Third, is there a misallocation of resources? The significant increase in property prices over the last years has diverted economic resources. Investment has gone into property instead of other sectors that could provide our economy with better value.
Consumers have seen their discretionary spending reduced to pay for their mortgages. This diversion of both investment and consumer spending has led to a misallocation of resources.
On the basis of these three criteria, it is likely that we are experiencing market failure in the property market.
I appreciate fully that the policymakers are in a quandary. I admit that no one can fully understand the difficulty a decision maker faces in such situations. I have been in such situations myself in other areas which involved public policy. I also understand that one cannot take too long a time to take such decisions.
On the other hand, we need to appreciate that whatever decision is taken on high-rise buildings will certainly have a long-term impact on our economy. This impact needs to be fully understood.