It rejects the myth that Malta’s construction sector is built on
I refer to the article signed by Michael Stivala about the building sector and the economy (August 13). He was responding to my contribution which claimed that the contribution of the construction sector to the economy is small. The main thrust of the article signed by Stivala was that Malta’s construction industry is more important than some might argue, and he specifically referred to my contribution.
Let me get his main issue out of the way. He picked a number that I quoted, Malta’s gross domestic product for 2021, where I evidently made a typing error. I also made one miscalculation based on that typo, and the writer then tried to remove my claim using that mistake. That error had no effect on the claim I made.
My contribution was one of three on the construction sector that I have written in recent weeks. The first was to show that property prices have outpaced the increase in wages and salaries. Official data showed that between 2016 and 2020, the total property price index had increased by 19.7%, while the average salary increased by 3.97%. I have stated that the only reason for such rising house prices is market speculation, and action is needed to stop it immediately.
A Housing Authority report published a few weeks later stated that young people are being priced out of the housing market. The paper concluded that “housing, whether it is renting or buying, is probably not a realistic prospect for young people in Malta if it were not for government intervention or family help, until they get married or cohabit, or relocate to Gozo”. As such, my point has been proven correct.
My second contribution on the construction sector was on the negative externalities it causes. I had listed a number of negative externalities, which are social costs caused by operators in the construction sector but which they are not incurring. The costs end up being borne by private individuals and society in general. Among the externalities I mentioned was the impact on our physical and mental health, the damage to the infrastructure and the damage to the environment.
I still hear someone denying that such externalities exist caused by the construction sector, or saying that they are a result of the imagination of many people living in Malta. They told us that we have to live only with them”because he has a right, let alone a pound” (everyone has a right to earn money). I repeated my claim that in the real estate market, we have a market failure in this country, meaning that there is a distortion in the market that works against either the supply side or the demand side. In the case of the real estate market, it is working against demand, which leads to super normal profits for operators in the construction sector.
We need to understand who is really laying the golden egg in our economy, which depends a lot on its ability to export goods and services, and not on its ability to build buildings.
My third contribution, which was the subject of the article signed by Stivala, deals with the contribution of the construction sector to the economy. I had claimed that this contribution was small. I also stated that the data on the income side of the gross domestic product, a significant percentage of the income earned goes to profit and not to employee compensation.
The data shows that the contribution of the construction sector to the gross added value was 4.4% in 2021 and that of the property sector was 6.1%. These figures have not been denied at all. So they are correct. A contribution of 4.4% and 6.1% make these two areas less important to the economy than manufacturing, tourism, retail, ICT and financial services. We look at the gross added value as it is the value that a supplier adds to the inputs that the supplier used to buy. It is the difference between the inputs and outputs of a supplier and represents the real contribution to the wealth of a nation.
In addition, we must appreciate that construction and real estate is a derived demand, which is a demand for a good or service that is a consequence of a demand for something else. If we did not have a tourism sector in our economy, there would be no demand for apartments to rent. If we didn’t have an iGaming sector, we wouldn’t have a demand for offices or houses, where expats can live. Construction is highly dependent on the demand created by other sectors in the economy.
Therefore, my claim that the contribution of the construction sector and the property sector to the creation of our country’s wealth is small, is correct and proven with data that has not been denied.
In my contribution, I also stated that employee compensation in the construction sector made a contribution of 1.8% to gross value added, while the real estate sector made a contribution of 0.3%. While these sectors as a whole contribute 4.4% and 6.1% respectively to gross value added, the share of employee compensation is proportionally much lower than average. Again, this data was not rejected.
The claim was made in the article signed by Stivala that “it is estimated that the wider building industry contributes to almost 15% of gross added value”. I need to be enlightened as to how this figure was arrived at as the writer of the article did not cite a source.
The bigger picture remains what I described. We have a sector that generates a cost for society and for individuals, and that is not being paid by those who cause such cost. That social cost must be connected to any contribution the construction sector makes to the economy. The contribution to added value is lower than that of other sectors. We have a market failure that needs to be addressed. What happens next is up to the policy makers.
I do not deny that the country needs a construction sector, as it needs all the other economic sectors we have. However, we need to understand who is really laying the golden egg in our economy, which depends a lot on its ability to export goods and services, and not on its ability to build buildings.
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