Be careful what you wish for
The armchair economists who have spent the last 10 years calling for the government to ‘do something’ to bring down property prices have got their wish. Property prices are falling, though not at the higher end of the market, where the sums fetched remain quite spectacular.
I had written a column or three in the recent past (you could hear me sighing, while wondering out loud why basic economics is not compulsory at school and why adults don’t bother to learn by observation) about the way falling property prices are invariably caused by economic problems and that they in turn cause further trouble. Hearing the constant whining about the ‘need to bring down property prices’ was enough to drive one to distraction.
During some lunch or other at which someone was heard to remark, yet again, that ‘the government should do something to bring down property prices’, I lost patience and said that the only thing a government can do to bring down property prices is throw the country into recession or become embroiled in a civil war, causing people to flee en masse.
I was perplexed that grown men and women just couldn’t understand that property prices cannot and do not fall in a vacuum. Sometimes prices fall because a particular sector of the property market is flooded, or because the design is poor and nobody wants that kind of thing. But that brings considerable problems with it, too.
Now that the much-talked-about recession is here, property prices are falling, and it’s not the government that has caused it. It’s international: the property market has slumped throughout North America and the United Kingdom, and is much weakened in Europe and the Gulf States which depend on expatriate investment.
In Malta we are fortunate in that there hasn’t been a slump but a dampening down instead of the heated increases we had been seeing over the last few years – and then again, in the low-end and middle market.
So finally, our armchair economists have had the graphic lesson they seemed to need: that property prices fall only when people don’t want to buy or when they can’t buy. That’s why property prices collapse completely during a severe recession and with large-scale unemployment.
No matter how inexpensive a house is, if you don’t have money you can’t buy it. If you don’t have a job you’re not going to get a mortgage, and if you’re worried that your job isn’t secure, you’re not going to take on a mortgage. And that brings us back to the original source of all this trouble in the world: people getting loans to buy houses they couldn’t afford, in North America.
The situation is unfortunate, but it might teach the armchair economists (people who rival our armchair architects in terms of annoyance quotient) a valuable lesson: that you cannot have a situation in which there is full employment, economic confidence, lots of money swilling around, and also low property prices.
When people buy flats and houses, prices go up. When people don’t buy flats and houses, prices stay the same for a little while as owners and developers hang onto them in hope. And then they begin to fall as creditors come calling, the bank threatens to foreclose (or actually does so) and property is ‘priced to sell’ – except that it doesn’t.
“I remember when you could get a Sliema townhouse for £10,000,” an acquaintance reminisced some time ago as she ranted on about how she and her husband couldn’t afford to move house “because of the government”.
She was irritating in the way of uneducated but supremely self-confident women who are entirely lacking in self-awareness, so I was tempted to suggest that if she got herself a job and an income instead of expecting to move house on a single salary, it might help.
But I put a zip on it and asked her instead what else she remembered about that time when you could get a Sliema townhouse for £10,000. When was it exactly – could she recall?
I could, because I lived there, and so did she. It was the early 1980s, when Malta was being racked by the maddest government it has ever known. Those who could leave were leaving. Those who had to stay had no money to buy. The ones who did have money to buy were stashing it away instead in secret bank accounts in Switzerland and the Channel Islands, until some of it was brought back by finance minister John Dalli’s amnesties on stashed cash. Most of it went straight into property, fuelling a real estate boom and causing prices to spike.
Property prices began to rise in Malta after 1987, when some kind of semblance of hope was restored, the economy began to recover and people’s standard of living began take on a semblance of normality. As our standard of living rose, property prices rose with it.
Prices were high because people could afford to pay them, regardless of what they might have claimed. Yes, they had to take on a burdensome mortgage, but everywhere in the world it is only the considerably well off who can pay cash for houses. In Malta, it’s the people who had money squirreled away in those secret bank accounts, and a few others.
People in normal jobs on wages and salaries don’t buy their homes for cash, anywhere in the world, and those dreaming of a situation in which they have their present income but Sliema townhouses are still £10,000 are just that – dreamers.
This article is published in The Malta Independent on Sunday today.
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Lovely article – wasn’t £10,000 equivalent to 5,000 liri Maltin or something?
[Daphne – No. When I use the pound sign for reported speech, I use it to indicate that the person said pounds and not liri, because nobody in my experience ever said liri when speaking English, even when speaking about Maltese money.]
Oh I see: I had no idea ‘pound’ was the preferred usage in English! Not that it matters much since you’ve euros now.
[Daphne – Pound and lira mean the same thing. Ultimately, they both reference the same measure of silver.]
Armchair economists or not the property market in Malta is a weird creature that defies any logical explanation. Prices do not fall in a vacuum but they certainly rise out of one. Explain to me this if you can. A particular house on a village street was on sale last year for the sum of Lm60,000 (for some reason sellers prefer to quote the old currency). A month ago, the owner pushed the price for the same house up to Lm90,000. Bearing in mind that nothing has changed; the house is till under the same ownership, no renovation was done to the house, and no gold vein was discovered in the basement what could have happened in less than a year to justify a markup of Lm30,000?
[Daphne = The market value of a piece of property is not what the seller decides it is, but what the market decides it is. Property owners in Malta tend to price their houses/flats not according to the market value but according to how much money they need to buy what they have in mind when moving on. Then they can’t understand why their house/flat doesn’t sell and they blame the ‘slowdown’. If your man here priced his house at Lm90,000 and its market value is Lm60,000, it’s going to stay unsold. However, if he does succeed in selling it at Lm90,000, then this is what it was worth – and the proof of this is that he found someone willing to pay that sum. Nobody in his right mind would sell a house for Lm60,000 if he can sell it for Lm90,000. It’s not a ‘mark-up’.]
Good article. Apart from economics, there is also speculation. Now seriously, property prices are still relatively high, and property design/size is crazy. Some properties simply can’t sell – they are either too small, or too expensive. In certain cases, the prices are cheap: one would be tempted to buy two apartments and join them into one by opening doors etc. Still, you would be left with tiny rooms that are only good if you can manage to sleep in an upright position.
Just look at malta from the air. You will see that the island is not as crowded with buildings as we are led to believe. OK, you have areas which are overcrowded, but no one does anything to change that – anzi, we pull down a townhouse or two, and replace them with 10-12 tiny apartments.
And what about aesthetics? Il-periti kollha qed isiru naqa estravaganti donnu. Having said that, there are apartment blocks to die for.
Insomma, jien ghandi id-dar tieghi – which I intend to keep for now, so… pity I can’t afford to buy a second one at a rock bottom price to sell later on at a crazy price.
Interestingly provocative as almost always. May I take u up on one key issue – government’s role in influencing the price of property? There is no doubt in my mind that the market economy and its element of competition have no credible option to date. Competition implies efficiency, effectiveness and innovation among other positive elements.
In my opinion, pseudo-competition is the major threat to the beauty of the market economy. Where does pseudo competition come into the property market debate? Micro players compete in the market-place yet market conditions are influenced by a handful of key players, notably the government.
Here are two examples out of many.
a. The tax regime that a government designs for the property market has an important bearing on demand and pricing.
b. Government policies as regulator of the financial market have an important bearing on demand and pricing.
Governments therefore have the power to create unsustainable demand that will lead to contractions like the one that we are presently experiencing.
Loans given by banks have everything to do with money supply. If loans are easy as they were in the USA, money supply expands as does the feelgood factor. Yet if this expansion is unsustainable (i.e. property prices rocket because that is what easy credit does) and people are taking on loans at too fast a pace (meaning that they are spending their future earnings now), supply will increase yet the prospect of future demand dims until a point is reached when the economy needs to deflate.
In these circumstances, it is governments that come to the so-called rescue with their ownership of banks, their quantitative easing (i.e. printing money because banks are too slow at increasing the money supply through their cautious borrowing), and in exceptional cases, with some car-scrap scheme intended to boost important sectors like car manufacturing.
My point is not to discuss government’s role per se but to emphasise the importance of that role in managing the economy, especially in the free market. Suggesting that governments are helpless in so many areas where they do, in fact, have the responsibility and power to act may not emphasise sufficiently the need for solid representatives in the house.
Our media may suggest the impression that we put people in parliament to decide on paedophile registers or traffic wardens. Whilst these are important issues, the economic dimension seems not to feature in our list of priorities.
Our parliamentary stock is pitifully bereft of minds that can influence robust economic strategies. These strategies, if they exist at all, are the domain of some anonymous advisers or whatever who operate far away from the democratic gaze in all its tattered imperfections.
It is a pity that economic issues are not sexy enough for our miserable TV fare. So in bringing forward your argumentation, I must say ‘prosit’ even if we may not agree on key aspects. I hope that contrast of ideas makes for some interesting exchange so lacking in our debate (or is it mostly chatter) culture.
Basic economics teach that where speculation is rife, the market is not perfect, but distorted. And where the market is highly distorted, government intervention is an obligation.
[Daphne – To distort the market further?]
Now whether we’ve arrived at that unsustainable point (in terms of wages to price ratio) can be debatable. But things were pointing in that direction.
Direct pricing intervention is not appropriate, but other countries, democratic and normal, have indirect means, say taxes on vacant properties. It does not trample on any rights, and acceptable in a liberal economy.
[Daphne – Actually, no, a tax on vacant property is completely unacceptable to liberal economic policy. It is a left-wing measure which seeks to reduce the amount of property owned by individuals as a ‘luxury’ (left unproductive), but certainly not liberal.]
Having many people on long-term loans due to artificially high inflated prices is no good, for other sectors of the economy will suffer. And with it, the political future of the government allowing this state of affairs.
Land is finite and cannot be created. While better without it, non-intervention in the property market is not that sacrosanct, especially when greed creeps in.
Expecting to pay Lm10,000 for a Sliema townhouse is ridiculous, but also being able to charge some Lm80,000 for a non-Sliema flat which induces claustrophobia.
[Daphne – That’s why it is precisely those flats which are not selling at all.]
@Sandro Pace
Could you please name the “countries, democratic and normal” which impose a tax on vacant property? I know of many such countries which impose property taxes but, so far, I have not managed to ascertain whether the tax you mentioned ever existed outside AD’s electoral manifestoes.
The reason why is simple. It is legally very difficult to determine what is “vacant” (a point AD made even more difficult for themselves by proposing to exclude “summer residences”). Which can only lead, first of all, to lots of “discretion” of slapping the tax. And how do you know if a property is vacant? Which invariably leads to a network of street spies.
Sounds uncannily like the 1970s and requisition orders doesn’t it?
“Could you please name the “countries, democratic and normal” which impose a tax on vacant property?”
I was born in one: Sweden. Any property, vacant, commercial, residential is taxable according to its value. I believe non vacant property is only taxed on acquisition though (over and above vat), but I’m really not sure.
Mr. Majistral
The District of Columbia in the USA does seem to have a vacant property tax, which is based on owner registration, and also on reportings. This is the USA, which has land to spare.
What does this has to do with requisitions?. The rational is simple. You can own as much as you like, but anything beyond your basic accomodation requirements, and you have to pay.
I disagree that this has anything to do with ideology or class conflict, but more with better use and administration of land. True that not all 2nd vacant property (under the same name) can be for sale, but no tax is completely perfect or without loopholes. You are using land anyhow, which is scarce.
Such a tax can also be applied to developers, market forces preventing them from passing it to the buyers.
Another factor which has hindered proper price comparison in the Maltese real estate market is the fact that until recently the size in square metres of a property was never indicated. It would greatly facilitate comparison if the price of property had a unit of value; e.g. euros per square metre.
Look at Manhattan island: it’s the size of Gozo with a population of almost two million. Property prices go up and down there like they do in the rest of the world. Anyone who thinks Malta is any different probably also thinks that spaghetti grows on trees in Tuscany or they’re estate agents.
Daphne,
Recession or not we had this situation coming. Probably for the first time since the Phoenicians set foot on these islands, the price of property is going down. Two factors cannot be overlooked. (1) There is gross oversupply and (2) there is very little land left to develop within the development zones.
In the 1970s and 1980s large tracts of agricultural land were being ripped up for development, mostly to be sold as plots for homes, which was why land was cheap. I bought my plot in 1977 for Lm900 – laughable money by today’s standards. Others got them completely free with a small amount of “cens” from the government. That situation was unsustainable, and – rightly so. Brakes were applied to the development zones. Result – land shot up in price to the point that the few plots of land that remain for terraced houses now cost as much as buying a finished house.
Then there’s the issue of oversupply. With land for development becoming ever more scarce, contractors started paying good money to buy terraced houses and even villas, demolishing them and building apartments in their place. Result – land on which previously existed a dwelling for one family now contained anything between four and eight apartments, if not more.
When the going was good, many home owners saw the opportunity to make a quick buck, sold their house to a contractor, moved into a flat and were left with a nice balance in their bank account. It’s going to be a different story when the time comes for them to sell that flat.
The result is that we have thousands of unsold flats all over the island, even in areas which were once traditionally house-only areas. And the inexplicable thing is that they are still being built by the score.
[Daphne – Yes, I agree. I saw it coming 20 years ago. And that’s why, when the block my husband and I lived in on Sliema’s Tower Road was sold for demolition and redevelopment almost 20 years ago, I refused to go for a replacement flat. I correctly predicted that a house with a garden, which was worth less at the time, would before long end up being worth several times more.]
@Pat
As you say “any property” is taxed and that’s not just Sweden. In that sense Malta’s case is probably unique in that there are no property taxes.
The case you mention does not sound very different from what’s the case in Malta with regards to capitals gains tax on sale of first residence.
@Sandro Pace
It would seem (I only claim knowledge acquired through Google here) is that the aim of the DC tax is to penalise owners of “nuisance property” which are urban sores. That is not an unimportant detail because, it seems, one of the ways of exempting yourself from the tax is to show that you are seeking to sell or rent the property.
This tax may not be unlike the requisition order when it comes to outcomes but it is certainly identical in methods. The “loopholes” are not to be shrugged off: in the 1970s an unscrupulous Minister used them to penalise the political unfriendly and award the political friendly.
As to your hope of “market forces” preventing sellers passing on this would-be tax on purchasers, I know of no one who sells at a loss or no profit margin other than in the short-term or in an act of individual desperation.
Incidentally, I note that most gripes about new developments seem to be against knocking down buildings to construct something in which the largest possible amount of housing units are crammed into the same footprint causing a feeling of congestion.
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