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A couple on Lm10,000 a year pays Lm3,228 to pay off a Lm55,000 loan over 35 years, plus Lm150 in insurance, leaving them with Lm383 a month to survive. So is housing on the open market accessible to couples earning less than Lm10,000? Godfrey Leone Ganado thinks not
The Church’s Justice and Peace Commission report has certainly sent a wake-up call for politicians to start addressing the financial drain facing first-time property buyers. But while asking the right question at the right moment, the document has failed to identify any clear-cut solutions. Is this symptomatic of a country where everybody grumbles but very few are courageous enough to come up with solutions?
 Godfrey Leone Ganado, an auditor by profession and a former Chairman of Enemalta, who co-authored the report, insists the role of the Church is not that of offering solutions.
“The Church’s role is to make reflections on injustices. It is the role of the state and politicians to come up with the solutions. But the Church does not stop here; it also gives an indication on the roots of the problems. Surely when a doctor makes a diagnosis of an ailment, he is also helping you to find a cure.”
The Church document singles out three main factors contributing to the spiralling of property prices, namely the anachronistic rent law regime which results in an unacceptable number of vacant properties, the increase in interest rates, and the long chain of middlemen in many property transaction. In its report the Commission expressed concern on the current practice whereby, apart from the contracted estate agent, a number of other individuals and consortia also involve themselves through the right of substitution as middlemen in the chain of property deals.
As a result property changes hands for a number of times before it gets to the ultimate owner of the finished property. This speculative practice is contributing to an artificial inflation in the cost of property.
“Let’s take a real case of a couple, who on the advice of a property agent, sell a house for Lm30,000. They enter in to a promise of sale agreement (konvenju) with a buyer on the basis of this price. Subsequently, a land speculator gets to know about the deal. He tells the new buyer that he is willing to offer Lm35,000 for the same property. In reality the speculator does not buy this property. He only buys the right to have his name on the contract.”
Even the government takes a cut from this exercise of speculation as the sale of the right of substitution is taxed. But this is not the end to the story.
“The speculator who bought the right of substitution for an extra Lm5,000 ends up convincing someone else to buy the same property for Lm45,000 – thus recovering the tax paid to the government, the extra Lm5,000 and also making a profit. At the end of the chain the first-time buyer could end up paying Lm60,000 for a property which was originally worth only Lm30,000.”
The problem for the new buyer is that the sum appearing on the final contract will still be Lm30,000 and he will only be able to take a bank loan on that amount. This is because the middlemen involved in the transaction did not actually buy the property but only bought the right to have their name on the contract.
When the right of substitution was originally introduced it was not meant to encourage speculation but to give a buyer some breathing space before deciding whether to register the property in his personal name or in the name of another family member. Leone Ganado makes a concrete proposal to eliminate this loophole once and for all.
“All we need to do is to amend the law to ensure that only immediate relatives and companies controlled by the individual concerned apply for the right of substitution when a promise of sale agreement (konvenju) is signed.”
The periodic increase in interest rates by the Central Bank is also contributing to rise in property prices. The additional interest cost of a 0.25% increase in interest is equivalent to an average annual interest payment of Lm100 on a loan of Lm40,000 and Lm137 on a loan of Lm55,000. “This is nearly equivalent to the cost of living rise given in the last Budget,” notes Leone Ganado.
While recognising that the primary objective of the Central Bank is to reduce consumer expenditure, he argues that one should distinguish between sheer consumption, and expenditure on housing which is a social necessity. “The Central Bank could exempt home loans of up to certain amount, say Lm30,000, from the increase in the interest rates.” He suggests that the Central Bank could still get at its over all goal with a sharper increase in interest rates charges on credit cards.
The Church commission is in synch with Alternattiva Demokratika on the need to reform the anachronistic rent regime. Yet the liberalisation of rents of post-1995 did not in any way lead to a decrease in rents. Leone Ganado argues that the problem with this reform was that it was limited to properties rented after 1995 and did not affect older properties regulated by the 1939-rent regime. “Property was already expensive in 1995. It is perfectly reasonable for a property owner who owns a property worth Lm40,000 to ask a rent equivalent to 4 per cent of its value from the tenant. This would translate itself in an annual rent of Lm1,600. Faced with such an exorbitant rents potential tenants prefer to take a bank loan to buy their own property.”
Leone Ganado insists that it is only fair to give landowners regulated by the pre-1995 rent regime a fair deal. “Many of these properties are rented at a sheer Lm12 to Lm36… some of the landowners are pensioners who never worked because they were well off in the past. Now they do not even earn enough to back up their meagre pensions.” He also notes that landowners also have to pay for repairs and to add insult to injury, some tenants even sublet these properties to foreign students during the summer months.
The tenant’s descendants also inherit pre-1939 properties. “Just as we removed the right of inheritance for properties rented after 1995 we can remove it for older properties.”
But Leone Ganado is aware that such measure could have a negative social impact on some genuine cases. “One could still make exceptions for social cases. For example over 50-year-olds taking care of their elderly parents could still be allowed to inherit.”
But just as the liberalisation of 1995 resulted in even higher rents, a liberalisation of older rents could also lead to exorbitant rents for tenants used to paying virtually nothing. According to Leone Ganado the government must find the right balance between the social needs of the tenant and the social needs of the landowner.
“One cannot increase rents from Lm24 to Lm2,400 a year. But surely one can increase a Lm24 rent to Lm120. Everyone can afford to pay Lm10 a month – this is what many people spend on Super 5.”
He also agrees with Alternattiva Demokratika that apart from resolving injustices, rent reform can also serve to cool down property prices. But he also warns that rent reform alone is no magical solution. “There is also a considerable number of vacant properties. Many are vacant because their owners do not want to rent them out. Rent reform will release a stock of housing stock, which can be used to address social needs.”
According to Ganado the owners of these properties cannot expect to charge exorbitant rents similar to those paid on newer properties. He proposes that the government should set rents on a 5 per cent annual return of the declared value of the same value used to determine the inheritance tax paid by the landowners. The government could agree with landowners to use these properties for social housing and take upon itself the costs of restoration. In return the government could pay the owners an annual return equivalent to 5 per cent of the value of the property.
Leone Ganado is satisfied that the Commission’s document has served its main purpose: that of instigating a national debate in the country. Opposition spokesperson Karl Chricop proposed that the government should flood the market with affordable social units to bring costs down. Leone Ganado is sceptical.
“I do not agree. Before thinking of flooding the market with new houses we should look at the existing housing stock.”
Yet Leone Ganado still envisages a role for government in providing social housing, especially in view of EU funding which could be made available for this purpose. “The European Commission’s Housing Charter states that housing can no longer be neglected by the EU. Housing projects were not even considered by the EU as infrastructural projects but this could change.”
Leone Ganado notes that millions of EU funds were spent on roads but none were spent on housing purposes. “Where are our priorities? Roads are very important but for the sake of human dignity housing is even more important.”
Yet over the past years people who bought houses at cheap subsidised prices ended up making a profit by selling their homes at market prices. Does this make any sense? Leone Ganado recognises this risk and comes out with a new proposal. “What keeps the government from helping those paying their loans by giving them an allowance or a rebate on taxation in the same way as it helps families sending their children to private schools. Let’s not forget that people also pay taxes on the interest rates they pay. The money saved by these families will be circulated in to the economy thus earning the government more taxes.”
Another solution being floated is a tax on vacant properties. In this way speculators may then have second thoughts about leaving properties empty for years on end until they find a high price. The Church Commission has not discussed this issue but Leone Ganado states that on a personal level he is very sceptical on this proposal.
“I disagree with such a tax because people buy property from income which is already taxed by the government. In case the property was acquired through undeclared money the solution is not a property tax but the imposition of fines on the amounts due to the government.”
He is also afraid that a property tax will penalise people who live under the illusion that the property bubble will never burst. “Some people have been fooled in to believing that the price of property will keep on rising forever. Instead of saving their hard-earned money in the bank they have invested property. That is why I am sceptical on taxing vacant property.”
Until some time ago the Church was a major property owner in the country. These properties now fall under the jurisdiction of the joint office, which transfers the property to the government according to the 1992 Church-State agreement. According to the GRTU if the land administered by the Joint Office were passed on to the private sector at a nominal price there would be enough property at reasonable prices for Maltese people.
But Leone Ganado denies the notion that the Church has any say in the joint office.
“This is a misconception. The joint office belongs to the government. It is responsible for administrating property which was taken away from the Church at gunpoint. This property is used by the government for social purposes.”
Recently Marisa Micallef-chairperson of the Housing Authority acknowledged that without this property the government would not be able to address the social housing needs of the country. Leone Ganado admits that some of this property can be sold at a price higher than the one sold by the church to the government. “But the profit margin is once again transferred to the church schools fund which is administrated by the government to pay teachers’ wages in Church schools. It is the government which is saving money through this fund.”
The Church also controls the APS Bank. Why doesn’t the bank set an example by offering discounted rates to first time buyers? “Two years ago the APS Bank went as far as refusing to pass the increase in the interest rate on clients paying their house loans. But it still had to pass on the increase in interest paid by the bank on deposits to its clients. In this way the bank ended up making less profit.”
Leone Ganado also insists that the bank has a fundamental role in the Church’s social mission. “If the Church stops receiving its dividends from the bank it would have to close down its homes for children and the elderly. The government would have to make up for this expense.”
Another factor leading to rising demand for houses is the increase in separations. “As soon as a married couple gets a separation, the demand for property doubles as two family units are created instead of one. Separated persons do not usually opt for one-bedroom flats because they already have children.”
According to Leone Ganado we are entering a vicious circle with couples separating after sacrificing precious family time to pay for their house loan. But after separating many end up ridding themselves of their original home at a cheap price because of pique. In the end they end up making a greater property investment after separation than before marriage.
But is the increase in the price of property such a bad news in a country where according to Nationalist MP Clyde Puli more than 70 per cent are homeowners? In a nation of property owners, is it not in everybody’s interest that the property prices keep rising? “But how much of this property really belongs to these individuals?” asks Leone Ganado. “Of course they have a legal title to the land but they still have to pay money to the banks. One should not forget that they have no alternative to becoming homeowners. They do not have an option to rent a place. People have to make sacrifices, by working more hours and thus spend less time with the family to pay the debt.”
Speaking on Bondì Plus Leone Ganado expressed concern that properties on the market are becoming smaller and smaller and that this is leading to more separations and depressions. But doesn’t the decrease in the size of properties decrease the pressures on the countryside? Leone Ganado acknowledges that this could be true but points out that high-rise development also has a negative impact on people’s quality of life.
“We have come to a point were 100 square metres of land is considered a luxury. Now we are speaking of 80 and even 60 square metres. What quality of life does a couple living in a property 10 metres by 6 metres have? This is creating more depressions and suicides.”
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