The rebound of the real estate market

Public debate on the construction and real estate sectors is often characterized by diametrically opposed positions. Some argue that the growth in construction and real estate development in recent years has been far too rapid and has caused too much damage to the urban landscape, social fabric and natural environment of the community. Others insist that the expansion of the construction industry is necessary for growth and reflects the modernization of the Maltese economy.

The Central Bank’s annual report for 2021 highlights the performance of the construction sector in the second year of the pandemic. The CBM confirms that in 2021, the industry rebounded from the recession of the previous year with “the growth rate of gross value added more than doubling compared to that of 2020 and investments generally returning to the levels before the pandemic”. A sobering comment is that the rebound in activity came mainly from commercial investment “while the recovery in residential investment has been modest”. The particular economic circumstances of the last two years are abnormal. COVID has virtually paralyzed many economic activities.

The economic downturn was not the result of regular cyclical changes. Thus, a more comprehensive examination of the evolution of the construction and real estate development industry is necessary.

There are signs that the accelerating growth in real estate development is not as impressive as it was a few years ago.

The number of development permits issued peaked in 2018 and 2019, with nearly 13,000 approvals in each of those years. Permits in 2021 are down about 40% from peak levels.

Proponents of the construction industry would argue that more needs to be done to breathe new life into the industry. Construction directly employs 6.7% of the active population and represents 4.5% of the economy’s total gross value added.

Taking an increasingly liberal approach to construction over the years, many politicians have argued that the industry is one of the most effective drivers of the local economy, as the ripple effect of real estate development on other economic sectors is important. The not so logical conclusion that some property development developers are coming to is that the industry should be boosted with taxpayers’ money, the easing of restrictions on the import of construction workers from third world countries and more tax incentives for home buyers.

The growth of the construction industry is not without substantial hidden socio-economic costs. The surge in real estate prices is partly due to speculation in a market that is still not very transparent.

Rising inflation, low interest rates and increased demand for rental properties have made real estate investing an attractive option for thousands of ordinary people who find that their bank savings are giving them insufficient yields. As banks have tightened their lending criteria for property development, some developers are often transferring the risk of their projects to small, inexperienced investors in the local bond market.

The construction and real estate sector should be watched closely by policy makers who should intervene more decisively when signs of a bubble deepen. Fiscal support for industry may already be a lower 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 in recent years.

Under the direction of policymakers, the Planning Authority must review its strategies to ensure that the continued growth of this sector is economically, socially and environmentally sustainable over the long term.

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