This week, I participated in an interview with The Malta Independent, the sister publication of The Malta Business Weekly. The interview, which will be published soon, covered a range of topics, with the interviewer posing assertive and incisive questions.
Anticipating certain market dynamics
This week, I intended to focus specifically on the housing market and its affordability, as well as the strain on our infrastructure derived from the expansion of sectors requiring additional labour and higher volumes of people to host as a small island state. In my current post-election campaigning, even though the next general election is five years away, it is evident that markets are constantly evolving and that people feel the changes in how these dynamics play out in daily life. Economists, upon observing market patterns, are guided by the principle of intervening and regulating when necessary. When market failures arise and adversely affect society, prompt regulation is required. Nevertheless, markets should ideally operate within the framework of government policies designed to ensure optimal performance when left to function independently.
Before implementing government policy and regulation, it is essential to assess market failures and ensure that regulations across sectors, beyond EU directives and legislation, are effective and timely in stabilising markets. My recent interactions with the public highlighted that affordable housing and infrastructure strain are the most pressing concerns. Although I am no longer engaged in research and lack the resources, not least time, to construct detailed econometric modelling, my current focus on climate and environmental risks underscores the need to examine how markets are failing some segments of society. Economic intuition is guided by a strong background in economic theory and by what people feel on the ground.
The housing market, prices, and rent subsidies
Let’s start with affordable housing. Certainly, rent subsidies and market affordability do not reflect what is happening on the ground, and clearly there is a gap between statistics and reality. Surely, we need to address such a gap as quickly as possible. While I was writing this article, some followers coincidentally texted me to say they cannot afford the rent. I am not suggesting we encourage dependency. Rather, we should help those who have faced difficulties in life to improve their situation. For example, single persons, divorced or separated individuals, and those working in retail are struggling to keep up with rent and housing prices. I understand that some policymakers tell you that the key to success is education. However, we still need to be aware of people who cannot make it, for reasons such as social backgrounds and vulnerabilities.
We need a system that promotes social justice. It is fine to own 10 apartments if you can afford them and to live off the market. However, policy must be adjusted to promote social justice. I am glad to see people earning money, but there must be a limit on speculation to give others a chance; otherwise, inequality will grow. Current Minister Owen Bonnici is doing a great job in social housing, and the ministry’s personnel are efficient in responding to queries. Certainly, the government’s policy aims to promote the development of additional affordable housing units to support these groups. However, we need not just purchases but also units providing affordable rent.
The introduction of tapered subsidies represents progress. However, it remains unclear why eligibility for rent subsidies is assessed based on gross rather than net income. While banks use gross income to assess mortgage credit risk and maintain financial stability with respect to the debt-to-income ratio, this approach is not suitable for government rent subsidies. Net income should be considered to reflect individuals’ financial realities better. Many individuals struggle to afford basic expenses after paying rent, even with subsidies, while also fulfilling separation income obligations and paying taxes on gross income. After all deductions from gross income, some are left in relative poverty with net income. The rental market has also undergone significant changes since reaching a tipping point some years ago.
The tapering of the rent subsidy benefit and the supply of apartments
The government is attempting to address these market dynamics by also implementing a tapering system for individuals whose incomes increase and who no longer qualify for the full rent subsidy. However, if an individual’s income rises slightly above the threshold, the system begins tapering the rent subsidy. In a context of labour shortages, this can discourage individuals from working additional hours, including overtime, as the extra income results in the loss of benefits. Fewer hours of work would result in more people being imported to fill the gap, unless automation gradually fills part of the gap. Perhaps an alternative approach is to introduce a percentage buffer rather than a fixed income threshold. For instance, if an individual earns an additional €500 per year and exceeds the entitlement threshold, the subsidy will taper gradually. Establishing a 10% or 15% buffer on annual income before disentitlement, and then tapering it, would enhance transparency and incentivise greater participation in work. People could easily plan the hours of work, and so will employers. Ultimately, perceptions of taxes and benefits are shaped by considerations of fairness.
Moreover, it is becoming increasingly difficult for Maltese people to rent out apartments. I even saw messages exchanged by property owners and agents stating that the property is to be rented to foreigners, meaning that, in addition to the price, the supply is also excluding locals. Hence, there are two problems here: rent prices and supply. There are two options available to authorities. Either taxing more in areas where locals are excluded or providing additional units. I mean, providing additional units means the government must supply them. We do have a situation that requires urgent attention to revise regulations and policy to manage and support such cohorts. And we need to accelerate the affordability process, building on the work already underway.
The marginal benefits and costs of additional economic growth
Surely, beyond rent subsidies, I have advocated for a comprehensive assessment of current GDP growth, particularly from sectors that place additional strain on infrastructure. For example, if certain sectors contribute an extra two percentage points of growth but require the importation of labour and increased activity, this must be balanced by investments in infrastructure upgrades, the allocation of agricultural land for sewage treatment facilities as well as road upgrades, and measures to address noise pollution, emissions, and rising rents and property prices. It is essential to consider the multiplier effects of economic growth, but we must also measure the costs to our infrastructure. When natural capital is depleted, the resulting pressure on limited resources can lead to economic overheating and destabilisation of our social fabric. This necessitates a revaluation of policy priorities and our collective responsibilities. And the Opposition must express which sectors they refer to when they speak of planning, as hitherto, they did not mention any.
Ultimately, we must reconsider what we, as human beings, owe to nature, and certainly what we all owe to each other, if we are to live in peace, sharing progress and prosperity.
