The sample survey conducted among construction enterprises by the National Statistics Office (NSO) published last Wednesday confirmed that there is a recession in the construction industry – a fact that has been consistently disregarded by a government lost in self praise on its much vaunted achievements in the economic sector.
The results of the survey reveal that activity in the construction industry continued to decline in the third quarter of the year when compared with the corresponding period in 2009: employment fell by 8.1 per cent, hours worked dropped by 9.5pc and wages and salaries paid fell by 2.2pc. Employment in construction activities fell mainly on account of a general decline in employment in the construction of buildings (-8.3pc), in civil engineering (-5.7pc) and in specialised construction activities (-8.3pc). Hours worked in the construction of buildings, civil engineering and specialised construction activities dropped by 14.4, 4.6 and 3.7pc respectively.
The survey does not indicate the situation in the case of those who provide services and ancillary works to the construction industry: professionals, interior decorators, estate agents and various tradesmen. It is impossible that these and importers of building materials have not been negatively affected as well.
The truth is that government can no longer keep ignoring what is happening in this sector of the economy and acting as if the problems being faced in the construction industry do not exist while loading this sector with more government induced costs.
Last week the media reported that in its annual report the International Monetary Fund (IMF) had warned that in the case of the Maltese economy after the “cyclical upswing, momentum is expected to fade.”
As regards the property market, the IMF report commented that “after an extended period of high growth, real estate prices experienced some correction and appear to have stabilised more recently, but excess supply remains in segments of the market. Experience from other countries in the euro area underscores the importance of treating such potential imbalances proactively.”
Given this background, it is well nigh incredible that according to the latest Budget, the estimated revenue from tax on deeds of property transfers is expected to increase by €10 million to €90 million. Since the tax on transfer of property is set at five per cent, this means that government is expecting an increase of a whopping €200 million in the value of property transfers.
There should be no doubt that something must be done to tackle the situation. First of all, it is crucial that the construction industry generally understands that the 2003/7 boom was caused by extraordinary massive capital inflows, when millions of euros of undeclared money in foreign banks were repatriated following a government amnesty, together with unrealistic expectations on Malta’s entry into the EU. This situation will not repeat itself over the next 10 years, if ever.
Secondly, a study should be undertaken in order to quantify, classify and estimate value of the current stock of properties on the market. At the same time the study should also estimate the demand for property from local and foreign sources for the next five years.
Government should also undertake reviews of both the legal infrastructure in order to facilitate sales of properties to foreigners and the relevant tax regime.
The final withholding capital gains tax of 12pc on the selling price was originally a good idea, solving a lot of problems during the boom years, particularly by encouraging vendors not to under-declare the value of transactions. However, this system is now causing problems whenever people are selling – or constrained to sell – properties for a much lower margin of profit than was the norm a few years ago.
This problem is exacerbated by the exorbitant fictitious market price assessments made by Inland Revenue-appointed architects with government than going on to charge the purchaser a five per cent document tax and the vendor a capital gains tax of 12pc on the difference between the declared selling price and the assessed market price. The Inland Revenue cannot go on pretending that property prices have not fallen and that market prices are what they were five years ago.
To tackle a problem, one must first acknowledge that it exists. Unfortunately, one gets the impression that government does not want to acknowledge the existence of any problem in the construction and property industry.
Tackling this problem does not mean that the state should subsidise developers. It means that government should change its attitude towards the construction and property industry by acknowledging its importance in the economy and taking proactive measures rather than simply consider it as a convenient cash cow.
It is in the interest of all concerned, including the banks, to tackle this issue in time and effectively. In other countries a collapse of the construction industry spilled into the banking sector. We are not anywhere near there, but we need to act in order to preempt avoidable complications.
Now that the NSO survey has confirmed the existence of this problem, the government cannot afford to keep playing possum.
micfal@maltanet.net