Public discussion on the construction and property industries is often characterised by diametrically opposing stands. Some argue that the growth in construction and property development over the last several years has been far too fast and has done too much damage to the community’s urban landscape, social fabric and natural environment. Others insist that the expansion of the construction industry is necessary for growth and reflects the modernisation of the Maltese economy.
The Central Bank Annual Report for 2021 highlights how the construction industry performed in the second year of the pandemic. The CBM confirms that, in 2021, the industry rebounded from the slump experienced in the previous year with “the rate of growth in gross value added more than doubling to that of 2020 and investment broadly returning to pre-pandemic levels”. A more sobering comment is that the rebound in activity came mainly from commercial investment “as the recovery in residential investment was modest”. The particular economic circumstances of the last two years are abnormal. COVID practically ground many economic activities to a halt.
The economic slowdown was not a result of regular cyclical changes. So, a more comprehensive review of how the construction and property development industry is evolving is necessary.
There are some signs that the growth acceleration in property development is not as impressive as a few years ago.
The number of development permits issued peaked in 2018 and 2019, with nearly 13,000 approvals in each of these years. Permits in 2021 dropped by about 40 per cent from peak levels.
Promoters of the construction industry would argue that more needs to be done to inject new momentum into the industry. Construction directly employs 6.7 per cent of the gainfully occupied and accounts for 4.5 per cent of total gross value added in the economy.
In adopting an increasingly laissez-faire approach to construction over the years, many politicians have argued that the industry is one of the most effective motors of the local economy, as the knock-on effect of property development on other economic sectors is substantial. The not-so-logical conclusion some property development promoters reach is that the industry should be energised with taxpayer money, the relaxation of restrictions to the importation of construction workers from Third World countries and more fiscal incentives for home buyers.
The growth of the construction industry is not without substantial hidden socio-economic costs. The escalation of house prices is partly due to speculation in a still not-quite-transparent market.
Rising inflation, low interest rates and a surge in demand for rented property have made the investment in property an attractive option for thousands of ordinary people who realise that their bank savings were giving them insufficient returns. While banks have tightened their lending criteria for property development, some developers often pass on the risk of their projects to inexperienced small investors in the local bond market.
The construction and property sector must be closely watched by policymakers who would need to intervene with more determination when signs of a bubble become more pronounced. Fiscal support for the industry may already be less of a priority than helping low-income families cope with the threats of high inflation.
The whole sector badly needs to be guided by a broader perspective. Overdevelopment has already caused too much irreversible social and environmental damage over the last several years.
Under the direction of policymakers, the Planning Authority needs to revise its strategies to ensure that continued growth in this sector is economically, socially and environmentally sustainable in the long term.