Some economics on rent law reform

Rent law reform is not a matter of if but when - the issue is well overdue, politically unavoidable and economically inevitable. In our country, it is only four decades of mutually destructive two-party politics that has allowed such a travesty of justice to be left un-dealt with for so long.

The government has so far "chickened-out" from any debate, while the Opposition sits on the proverbial wall of political opportunism waiting for Government to make the first (or rather second) move.

Instead of grabbing the bull by the horns and legislating to give people back what is rightfully theirs, while ensuring that everyone (and I repeat everyone) is afforded decent housing, Government and Opposition have preferred dealing with "more urgent and important" matters like the privatisation of Sea Malta. I could argue for pages of the many facets of this matter; however the purpose of this article is to highlight just a few of the economic benefits that can be expected from a reform. Here goes.

Malta requires a well-managed and stepped liberalisation of its rent laws. Within a specified period owners will effectively take economic repossession (if not physical repossession) of their properties. This will enable them to borrow money on the strength of the equity in such real estate.

Many will borrow money, others will use their own funds to improve, expand or simply decorate their properties, many of which have been, and quite understandably may I add, left in a serious state of decay. This economic activity will generate work for builders, plumbers, electricians, painters and a host of other tradesman, as well as increase retail activity as a result of the purchase of furniture, fittings, soft furnishings, brown goods and white goods. Government is also expected to rake in serious revenue from VAT and income tax as a result of such. The economic multiplier from such will be, as you can well imagine, both long-term and significant.

Property owners will finally be able to earn a market or close-to-market return on their investment rather than the miserable pittance many of them recover today. The reform should enable tenants to claim subsidies on rents - naturally entitlement to such must be means tested. It is completely unacceptable, and in a few particular case disgusting for some property contractors, property moguls and business people to be living off the back of their landlords.

A change for the better in our rent laws can also have the effect of actively encouraging the re-entry into the market of up to 30,000 properties that today lie vacant and unused, ironically in a country where the scarcest resource is space. The gradual release of more housing stock onto the market will increase supply, after which we can expect the annual increase of both rental and purchase prices to be more in-tune with returns on alternative assets/investment.

What is certain is that property inflation of the magnitude of that registered in recent years is completely unsustainable and even, I dare say, bears the seeds of a property bust. If returns from property become more comparable to (say) yields on bonds, equities and business investment, then the chances are that more local investors will plough the huge savings this country has at its disposal into productive investment, rather than simply real estate speculation.

Productive investment will generate employment, may improve our external trade balance and could indeed kick-start our economy that has, over the past four years, been in an economic coma of zero-growth.

Reform in our rent laws would also contribute towards re-establishing the rental market that was re-kindled to some extent with the 1995 reform, one that gave some (but not complete) peace-of-mind when renting to locals. A property market is indeed incomplete without a proper and affordable alternative to outright purchase.

Every reform entails costs, and this one will certainly be no exception. However, with a well planned reform costs can be very significantly minimised. The primary cost will be that related to subsidising the rent of those who genuinely cannot afford to pay market or close-to-market rates for a rented home.

This is a reality that must be faced boldly by Government. It is no longer acceptable for property owners to subsidise their tenants; the prevailing system of enforced charity is an institutionalised divestiture of the state from its social obligations and must stop! Housing for the needy is a benefit that should and must be provided by our welfare system.

Realistically the funds must come from somewhere. We believe that the funds can be generated from a number of sources. The government just has to pick and choose. The first source is from savings from capital outlays that will be made when the Housing Authority will no longer need to build properties because it can access vacant properties in the marketplace.

The second source will actually be increased tax revenues from a reactivated rental market; it may be wise for government to explore a flat tax regime for property rentals whilst stepping up tax compliance in this area, that is, to say the least, lax.

Another source of income is that from the taxation of vacant property. It is indeed reasonable, once our rent laws have been liberalised and property owners given back their real estate, to levy a tax on those properties that are capriciously being left vacant for years on end. In a country with so much scarcity of land, it is unacceptable for property to be stored like gold - purely for speculative purposes.

To really incentivise property owners, the vacant property tax can be a form of withholding tax - so that no further income tax will be due. Should Government opt not to introduce vacant property tax, it can always tap its massive holding in both urban and rural property. A birdie tells me that the Joint Office controls more than a billion liri worth of property. The sale of part of this property stock, a sizable chunk of which has also capriciously been left lying vacant, can give Government the funds to subsidise rents or, better still, assist the needy to purchase their own homes. The possibilities for a smart reform are not limited - it is only the courage and creativity of Government and Opposition that are.

The existing body of rent laws results in a zero-sum game, with the loss of owners equalling the not-always-so-legitimate-gain of tenants. A change for the better in our rent laws will be a win-win for most of the stakeholders. The only losers in the new scenario are the wealthy who live off their landlords; though!

As many of you are probably already aware, Alternattiva Demokratika has initiated a campaign to hold an abrogative referendum on our existing rent laws. Those of you who would like to simply sign-up or, better-still, work for this campaign, are encouraged to contact us on tel 2131-4040, or by e-mail at info@alternattiva.org.mt, or can simply visit our Website (www.alternattiva.org.mt) to download the form on which to put and/or collect signatures - these should be mailed back to us at Alternattiva Demokratika,10, Manwel Dimech Street, Sliema.

Edward P. Fenech is spokesman on finance, the economy and tourism for Alternattive Demokratika - The Green Party