I would like to pick up where an editorial of Times of Malta about affordable housing had left off. I have long claimed that housing prices have spiralled upwards and are increasing at a faster rate than wages in a very significant manner. I have also claimed that for a long time there has been market failure in the property market and that the government should intervene to address this issue.

Housing prices are neither affordable nor sustainable, and this is so not because of some excessive demand which has created a shortage, but because of property speculation. Now we have had a report by the Housing Authority and a report by KPMG which have both confirmed this phenomenon of unaffordable housing, in addition to data sourced from the National Statistics Office.

I would like to highlight some aspects of this challenge which we are all facing as a country and which we need to address if we want to have more social cohesion and a fairer economy.

Yes, we need to appreciate once and for all that the problem of unaffordable housing is not a problem only of young people seeking to buy their first home and their family, but is a problem of us all, as it could impact negatively the whole of society and not just part of it.

I start with the issue of market failure. Market failure occurs when the market system brings about an inefficient allocation of resources, leading to a situation where either the supplier or the buyer gains a benefit which is larger than the benefit gained by the other side. In our case, the suppliers are making extraordinary profits, while buyers are having to buy housing at prices which are not sustainable. Since there is market failure, government intervention is justified.

One may also argue that housing should be considered as a merit good as it has high positive externalities. The social benefits of home ownership far outweigh the social costs. In a previous contribution, I even claimed that home ownership is to be considered as a human right. As such, if we were to consider home ownership as a merit good, just like education and health, then government intervention in the market is even more justified.

The country needs to have sustainable and affordable housing for its own good. In one way or another, government intervention is required to make this happen

In effect, successive governments in Malta have promoted home ownership through various initiatives such as subsidised loans, low price for land or even granting of built-up property to those in greater need. In more recent years, interest rates were actually quite low and banks even extended the term of home loans.

This should have led to making housing more affordable. However, it did not as sellers/developers increased their prices in a manner such that they took all the benefit of lower home loan servicing costs. All this further strengthens the case for government intervention.

Another argument in favour of government intervention in the housing market is wealth distribution. A senior bank official had once told me that the purchase of a home is the biggest investment one makes in one’s life. Governments have sought to encourage home ownership also as a means of having a fairer distribution of wealth.  If young people are being forced to rent as they cannot afford to buy their own home, or the cost of servicing their home loan becomes very difficult to sustain, then this objective of having a fairer distribution of wealth would not be achieved.

Housing prices need to become affordable and sustainable to reduce wealth and income inequalities.

Employers have also had to bear the brunt of spiralling housing prices. As the increase in housing prices continued to outstrip the increase in wages, employees have been forced to ask for higher wages to pay for such housing. In turn, employers have had to increase their wages to keep their employees. Can such an increase in wages be sustained in future? I very much doubt it.

Yet another consideration is that parents and grandparents have had to eat up their life’s savings to help young people get on the property ladder. Unless such help was forthcoming, many young people would never have been able to buy a property. One very shocking piece of the data from the KPMG report, which I referred to earlier on, is that “households on a median income could only take out a mortgage that financed 76 per cent of the median asking price for apartments”.

However, what we are doing is simply postponing the problem and we are risking having a population of senior citizens on the verge of poverty because they would have given up their savings such that their children and grandchildren could buy a home.

The country needs to have sustainable and affordable housing for its own good. In one way or another, government intervention is required to make this happen.