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No property bubble in sight

Although the Cyprus Finance Minister does not foresee another property bubble and believes that the downturn of the sector has bottomed out, the ECB believes there will be further price falls.

Cyprus property bubbleFINANCE minister Harris Georgiades said that Cyprus is not facing another real estate bubble, adding that the government is prepared to further help banks reduce their non-performing loan stock by improving the responsiveness of the judiciary.

“Neither the European Central Bank nor the International Monetary Fund would agree with you that we are heading towards a new property bubble,” Georgiades said in an interview on Thursday. “In fact, they take a view which is quite different – that the (price) fall hasn’t even been completed. And I would specially say that this is the view of the ECB”.

“I wouldn’t agree with the one extreme or the other, nor with the view that there will still be a further significant drop in property prices, nor I would say that that a new property bubble is imminent,” Georgiades said. “I would, in fact, take a middle-ground approach on this issue, essentially saying that the downturn of the sector has bottomed out, that we are seeing early signs of recovery, but I do not expect that circumstances will repeat themselves so as to fuel another bubble”.

According to Central Bank of Cyprus data, home prices fell from April to June a quarterly 0.4 percent. Home prices in Cyprus, which peaked in the third quarter of 2008, have dropped since almost 31 per cent on average. In July, the parliament passed a government bill offering tax breaks to property transfers, in an attempt to boost demand for real estate, which add to existing incentives offered to foreign investors, including a residence permit or, depending on the size of an investment, the Cypriot citizenship.

“What we are interested in is a stabilisation of the property sector,” Georgiades said, adding that a “significant stock” of properties, including holiday homes, apartments, and other commercial properties, would not allow another real estate bubble.

According to the latest building permit figures posted by Cystat, the area of new residential projects approved by local authorities was in the first eight months of the year 22 per cent more, compared to a year before.

Georgiades said that Cypriot banks will not need to enter a third round of capital increase as they can further strengthen their capital basis through profitability.

Even following last week’s request of an additional capital injection of up to €200m by the bailed-out Cooperative Central Bank, which administers 18 independent cooperative savings banks, “I do consider that our banks have been extensively recapitalised,” Georgiades said in an interview. “I believe that, since the climax of the banking crisis, we have made huge progress and attained satisfactory capital adequacy, enabling the banks to operate and strengthen their capital adequacy through their operations and organic profitability”.

The Cooperative Central Bank increased its provisions by €527m to €3.4bn in the third quarter of 2015, which is half of its 90-days-past-due loan portfolio.

While the bank, with a capital adequacy ratio of 12 per cent and a non-performing loans ratio of almost 60 per cent in September, meets “both existing and anticipated future higher capital ratios,” the government expressed both its “willingness and capability” to help the lender, the finance minister said. “There is no capital shortfall, it is in fact a demonstration of the strength of the Co-op that it has been able to increase provisions”.

In 2014, the government injected €1.5bn into the cooperative banking sector as part of Cyprus’s bailout agreement. Georgiades said that the government is already in consultations with the European Commission’s Directorate General Competition concerning the planned capital increase at the cooperative banks.

The finance minister said that the government is prepared to take further steps towards helping the courts, which are known for their culture of delay and may have to deal with an increase in cases concerning foreclosures and insolvency after the relevant laws were put in place earlier this year, function “quickly, smoothly and credibly”.

“I do not restrict it solely to the foreclosure and insolvency processes,” he said. “In general, we want an efficient and credible judiciary as a key element of what [Cyprus] offers as a business services centre”.

The government, which exempted the judiciary from a general public sector hiring freeze, part of a wider fiscal consolidation effort, created or facilitated the creation of additional posts of judges, he said. “We are creating, as of January 1, a new administrative court that will relieve the burden from the existing court processes. And we are investing in e-justice, a transformation of the judiciary from the unacceptable paper files to an information technology-based operation”.

Therefore, the Finance minister said, he sees the glass as “half-full” with respect to non-performing loans, which make out roughly half of the banking system’s loan portfolio, exacerbated by the 2013 banking crisis and bank holiday, with the subsequent imposition of capital controls, and a prolonged recession. “All these factors have since been addressed,” he said.

Still, even as the economy started to recover, banks beefed-up their internal divisions dealing with loan restructurings, and authorities put in place a new legislative framework, which included the lifting the title-deed deadlock, the introduction of banking mediation and the enabling of loan-sales, non-performing loans may take time to drop as “there is no quick-fix solution,” he cautioned.

The finance minister added that he remains “optimistic” about the economy, which started to grow in the first quarter of the year after 14 consecutive quarters of contraction. “My confidence, however, is based on a very important prerequisite: that we shall continue along the path of continuously promoting reforms and structural changes, of maintaining discipline, of maintaining a business-friendly environment, and of maintaining the effort to strengthen the banking sector”.

Readers' comments

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  • scruffy says:

    @Nick

    What is this figure of 22,000 you quote? If, as I assume, it is an average wage in Cyprus then all that means is that someone with an average wage in Cyprus cannot afford to buy a house. Clearly, they would have to be earning around 40 – 50,000 to be able to buy a house even at the lower end of the market. That would be true of any country in the world. Property prices have never been linked to “average earnings”. That is why not everyone who works can afford one. Unless I am completely misunderstanding you this is a strange point of view re property prices.

  • Nick says:

    @editor & @scruffy

    I think a more valid source of information would be the RICS index since they have a better view of the market and even so, anyone living in Cyprus would know better that getting a € 300,000 euro loan from a bank in Cyprus is really a joke, no Cyprus bank gives loans these days. Yes they take in loan applications but its only for marketing purposes to show that they are still in business. They always find excuses to make it impossible to meet the criteria for the loan. I know people that work for the government have 2000+ in salaries, less than €50,000 in total loans with no delays and they are rejected for an €5000 to €8000 loan fully secured with property guaranties. So make the math for yourself.

    Yes the editor is right supply and demand partly defines the market price. But demand does not mean only that someone “wants” to buy a house, it means that someone “wants” and “can” buy a house. So my analysis before is based on international standards – 4 Different Rules of Thumb For How Much House You Can Afford.

    CNN says 2.5 times gross annual income (€22,000 x 2.5)

    Investopedia says says 2 times gross annual income (22 000 euro x 2)

    The now bankrupt Washington Mutual Fund suggested up to 4-5 times gross annual income (€22,000 x 5)

    So even at the best case scenario a good property in Cyprus should not exceed €100,000.

    Now in Cyprus with the very latest statistics we are at 10-20 times gross annual income !!!!

    No sales ? No wonder …. do the math , it simply doesn’t add up.

  • scruffy says:

    @ Nick.

    It is true that the market value is what someone is prepared to pay for a particular property.

    I think to say that property in Cyprus should fall another 50% is just nonsense. Particularly now that the deeds issue is being addressed.

    I don’t know what and where the properties are that you are referring to as wildly overpriced but wherever they are, I’m certain that there will be many other factors that are justifying the asking price.

    e.g There are are 2 bed bungalows in some of the farming villages going for as little as €75,000. The same bungalow in the resort of Protaras will cost more than double that.

    If you seriously expect the village house to be on the market for under €40,000 or a bungalow in Protaras for 75,000 you are in dreamland.

    I can’t think what countries you are comparing values with but to buy a similar property as mine, in a similar location in Scotland, would cost me more than double what my property here would.

    I believe that in a couple of years from now, especially if deeds are being issued as indicated, property prices in Cyprus will rise substantially. Why? because Cyprus is a very, very nice place to live. If you want bargain properties at rock bottom prices I hear that such properties are abundant in the less desirable areas of most British towns. Of course, rock bottom even in those areas, will likely still be more than what you can find here.

    My advice to you and others who complain that properties are still too high in Cyprus, is to be careful that you don’t completely miss the boat by believing the hype that property prices will fall further yet. It can all change very quickly.

  • Nick says:

    There are a few suggested formulas to calculate the price of property.

    1) The price of a property is 2-3 times the gross annual income of a buyer. In Cyprus is about €22,000 so the price of a completed house should be between €44,000 to €66 00,0, now its more than €200,000 for a really small house. So even at best the prices are 4-5 times higher than they should be.

    2) The price of a property is defined by rental income. The Annual Rental income should be at least 9% of the property value to break even. Now it ranges at around 1-3% at best. So using this formula prices are 4-10 times higher than they should be.

    The only “real” sales that exist at the moment are people wanting to get citizenship but this program will close soon and many people who got the Visa plan to sell in 2-3 years time when the limitations due to the Visa expire.

    So I wonder where does the minister get his data from? Facing reality and asking for realistic prices would make thing easier. Prices must fall for another 50% to be in-line with reality.

    (Editor’s comment: The price of a property is determined by what someone is prepared to pay. During the boom years people were prepared to pay huge sums of money for very little.

    As the latest RICS (Cyprus) Index states “there is still room for some re-pricing of capital values to take place, especially for properties in secondary locations”.

    As for rental yields, check out the Global Property Guide’s country investment ratings.)

  • Peter Davis says:

    The Government injected 1.5 billion euros into the co-op bank. No no no. The Government doesn’t have any money. Money is taken from the taxpayers.

    As for a bubble, the Government should look to the UK which has a proper register, where you get title deeds and lawyers are held responsible for shoddy work. Where property increases in value and is worth what you pay for it. Where a system protects the buyer and property is an investment.

    As for a bubble, why would anyone want to buy here? You will lose your money and not be able to sell, at least not for the price you’d paid.

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