The Governor of the Central Bank, Mario Vella, has called for changes in the housing market, particularly social housing and the rental market. On the latter, he said that social housing should no longer be a lifetime entitlement.

Dr Vella was speaking at the annual dinner of the Institute of Financial Services.

He observed that house prices had continued to rise.

National statistics data suggested an increase of 5.3% during the first half of this year, as against 6.1% in the same period of 2016 and 3.2% in 2015. Housing supply was responding to the high demand that was contributing towards house price inflation.

In the first seven months of this year, the number of building permits was 62% higher than they were in the same period of 2016 and 153% higher than in 2015.

“This increased supply, unless there is a further acceleration in demand, should result in housing price inflation moderating. This should also help to reduce pressure on the rental market, where there is evidence that from being at the lower end of cross-country rent-to-wage ratios, we have moved relatively quickly to being close to ratios found in the most expensive European cities,” Dr Vella said.

Besides the impact that this rise could have on Malta’s capacity to attract foreign workers, Dr Vella said there was need to consider its impact on Maltese tenants, which in turn would impact on the broader costs of doing business and, consequently, competitiveness.

“Going forward, if we continue to grow at the rates observed in recent years, we will need to have a much more dynamic housing market.”

SOCIAL HOUSING CHANGES

Referring to social housing, Dr Vella said there was a need for replenishment of social housing stock, but this had to be accompanied by a change in approach.

“In recent years, most of Malta’s benefit system has been changed so as to create clear incentives to shift from benefit dependence to participation in the formal labour market. The only area where this is not happening yet is social housing, where the tendency remains that, once allocated, social housing tends to become a lifetime entitlement. We need to change this so that social housing schemes act to activate individuals and empower them rather than encourage passivity. Such a transition could itself be helpful in financing the expansion of social housing.

“Instead of seeing social housing as a passive benefit, we can eventually develop projects which become to an extent self-financing, through a combination of social housing provision and programmes to enhance the employability of individuals, enabling them to eventually pay market rents. The financial sector could play a role here. We have already seen how some banks have partnered with government to offer social loans, which are beginning to decrease reliance on the social housing stock. Going forward, we can see the possibility of other innovative initiatives where the Housing Authority partners with financial institutions to develop social housing projects,” the Governor said.

HOME EQUITY RELEASE

He added that another area where progress was needed was home equity release.

“We have a situation where many elderly persons are asset rich but cash poor. They live on relatively modest pensions, while residing in large and relatively expensive homes. This creates issues for financing long-term care, as many find it difficult to sell their homes outright in order to go into a private home. If, over the coming years, we manage to come up with ways of releasing part of the equity in homes, this could raise the supply of available housing, reduce the pressure on state long-term care institutions and hospitals while guaranteeing better living standards for our elderly. This, of course, needs to be done carefully, sensitively and in a well-regulated environment. Once again, we believe that financial institutions can have a key role to play here,” Dr Vella said.

The rental market, he said, was another area where there was a need for action, with due consideration of the trade-offs involved.

“Any measures that are too restrictive could take us back to a previous situation where the rental market was utterly dysfunctional. On the other hand, we should not shy away from reforms that facilitate a better functioning of the market. We need more legal clarity about the rights and obligations of landlords and tenants.

“We also need to have this market operate in the formal economy, with central contracts duly registered. Stabilising this sector will be beneficial to our economy’s competitiveness, whilst also helping to address social inequalities. Although loan-to-value (LTVs) ratios range from 60% to 90% (and lately we have observed a shift to the upper bound) the banks have largely kept to their cautious approach when extending credit for buy-to-let purposes. We think that their prudence bears witness to the maturity of our financial institutions, though more caution in mortgage credit for secondary residences is called for.”