A measure that served its purpose

How the reduction in the stamp duty on Gozo properties revived the real estate market on the island.

At the end of 2023, a policy that had been announced in the Budget for 2017 came to an end.

Back in October 2016, then Finance minister Edward Scicluna announced that “for one year only, we will be launching a new incentive for persons who buy residences in Gozo”. The incentive was that stamp duty on properties in Gozo was reduced to 2% from 5%.

The reason for this decision is clear when one compares the evolution of the real estate market in Malta and Gozo over time, and the underpinning economic background. In 2002 Gozo had a GDP per capita that was 57% of the EU average. The impact of EU entry was particularly hard on the Gozitan economy, and the administration of the time, led by Lawrence Gonzi, paid little heed to this. By 2012, Gozo’s GDP per capita had fallen to 50% of the EU average, despite the fact that the EU had gone through a major financial crisis and was in the middle of a sovereign debt crisis.

The relative economic stagnation of Gozo greatly affected the real estate market. Data published by the National Statistics Office (NSO) indicate that the proportion of promise-of-sale agreements in Gozo out of the total real estate turnover fell from 11% in 2005 and 2006 to a miserly 7% in 2009 and stayed resolutely there till 2016.

Promise-of-sale agreements did show some pick up in absolute numbers starting in 2014, but the rise in Gozo fell behind that observed in Malta, where the market was booming. From a monthly average of 77 promise of sale agreements in 2006, by 2012 the monthly average had halved to a mere 36. By 2016 the monthly average had gone back to 75.  

Positive results

The announcement of the reduction in stamp duty kickstarted the real estate market in Gozo. Already in the first year, the proportion of promise-of-sale agreements in Gozo had risen to 9% of the total and to 12% in 2018 and 16% in 2019. The pandemic brought the ratio slowly back to 12%, which is close to what it had been in the immediate aftermath of EU accession.

Since the stamp duty was introduced, the monthly average of promise-of-sale agreements in Malta and Gozo have grown at very similar levels. The Gozitan real estate market recouped lost ground and activity boomed. From a monthly average of 75 in 2016, promise-of-sale agreements in 2019 had doubled to a monthly average of 157, reaching the peak of 194 in 2021. To put things in perspective in Malta the rise was from a monthy average of 1,053 in 2016 to one of 1,110 in 2021.

Had the Gozitan market remained stuck at its 2016 pattern of behaviour it is highly likely that the number of promise-of-sale agreements would have been less than half that which were actually entered into. In fact, instead of nearly 11,750 promise-of-sale agrements, there would have likely been less than 5,700. This estimate was made taking the relative proportion that Gozitan activity made up in relation to that in Malta in 2016, and applying it over the activity as it evolved in Malta in subsequent years. In all likelihood, the stamp duty reduction accounted for the bulk of the rebound in real estate activity in Gozo after 2016.

What now?

Will the removal of the incentive bring the market back to its pre-2016 sub-optimal state? This is highly unlikely. Firstly, the incentive was always intended to be temporary and, in all likelihood, would have been removed in 2020 had the pandemic not intervened. Secondly, there are now a rather different set of incentives that should keep the market going. For first-time buyers, there is now the first-time buyer grant, while for those who purchase in UCAs the grant awarded is a whopping €40,000, besides the complete exemption of stamp duty. There could be some decline in the proportion of those who buy a second property in Gozo, but even here the effect is likely restricted to those who would be purchasing a flat, as the incentives to buy a UCA property are quite strong, even for second property buyers.

That said, even if there is a reduction in real estate activity, this should be welcomed. In fact, it was one of the reasons why the incentive scheme was withdrawn. Government wants real estate development in Gozo to follow a different path and to focus on renovation of existing buildings.

The stamp duty reduction has clearly served its purpose. It is now time to focus on the implementation of the strategy of Gozo as an island of villages.

Photo: Hans Pohl/Flickr

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