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Saturday 11th July 2020
Home Investor Centre The end of Cyprus’ remarkable real estate boom

The end of Cyprus’ remarkable real estate boom

Sunset at Petra tou Romiou (Aphrodite's Rock)
Sunset at Petra tou Romiou (Aphrodite's Rock)

CYPRUS’ remarkable three-year housing boom ended in 2008. The market’s peak was in November 2008; after that, prices began to fall.

According to MAP S.Platis, who prepare the BuySell Home Price Index, average home prices fell by 2.17% (-3.22% in real terms) year-on-year, to € 187,053 in March 2009.

The crunch was mainly caused by lower demand from British buyers, who comprise around 70% of all foreign buyers in Cyprus. The UK recession and the weakening of the pound against the euro has prompted British buyers to look for non-Euro destinations, according to Global Finance, a business and finance magazine. Property demand from non-Cypriots buyers fell by 50% in the last period of 2008.

Sales dropped in the first half of 2009 to 842 properties, from more than 3,800 properties sold during the previous year’s equivalent period (Cyprus Land Registry). It could take four years for Cyprus’ property market to return to normal, according to the Land Registry’s Andreas Christodoulou.

At the peak of the boom, property prices were rising by 20% per annum at one point, boosted by huge external demand, low interest rates and the expected imposition of VAT on purchase of new property.

Now that the UK is in recession, Cyprus house prices are expected to continue falling. Domestic demand is also expected to weaken, with Cyprus’ GDP growth likely to slow to 0.3% in 2009. Unemployment rose to 4.6% in Q1 2009, up from an average of 3% in 2007-2008.

High interest rates

Variable-rate mortgages account for 97.8% of all housing loans in Cyprus, making the market vulnerable to interest rate shocks. Cyprus’ interest rates are among the Euro area’s highest, though rates fell slightly to 6.4% in May 2009, from a 6.8% average in Q1 2009.

Banks in Cyprus have been slow to respond to interest rate cuts, and there is a big margin between the Central Bank key rate and their interest rates. That is because there’s little inter-bank lending, so banks rely on customer deposits for funding. Many banks pay high rates to attract deposits, according to Finance Minister Charilaos Stavrakis.

Note: The adoption of the Euro in January 2008 led to a significant change in the method of calculating interest rates (from May 2008), and the data are now harmonized to the European Central Bank’s requirements.

Unparalleled growth of the mortgage market

There has been an enormous growth in housing loans, which have risen from 6.8% of GDP in 2005 to 49% in 2008, due partly to intense competition between banks. Most banks in Cyprus offer 70% mortgages, with a maximum of 30 years repayment.

Lower rental yields

The slowdown in tourism and the global crisis have contributed to a fall of rental yields in Cyprus, according to Cyprus Property Magazine. The average rental yield in Cyprus as of August 2008 was 3.81%, according to the Global Property Guide – lower the 4.7% average yield the previous year. Nicosia has the highest yields, at 4%.

Costs of buying a 120m2 square metre (sq. m.) apartment in Cyprus:

  • Nicosia: average price: €1,736/m2. Rental yield: 3.76%.
  • Limassol: average price €2,513/m2 Rental yield: 3.45%.
  • Paphos: average price €2,149/m2 Rental yield 2.83%.
  • Larnaca: average price €1,673/m2 Rental yield 3.64%.

Economic slowdown

Cyprus has been shielded from the crisis, largely because of its low reliance on exports, prudent fiscal policies, the adoption of the Euro, resilient financial sector, and limited exposure to subprime mortgages, as noted recently by the IMF. Nevertheless it is headed for a sharp economic slowdown in 2009, as the crisis enmeshes its key economic partners – the U.K., Greece, and Russia. GDP is expected to grow by 0.3% in 2009.

The number of building permits for residential properties fell 24% in April 2009, to 1,252, from 1,658 permits last year. Tourist arrivals dropped by 10.8% to 883,002 during the first half of 2009. Tourism and construction play a major role in Cyprus’ economy. The service sector (including tourism) contributes 79% to GDP and employs 71% of the labour force.

Consequently, unemployment rose to 4.6% in Q1 2009, though Cyprus still has one of the EU’s lowest unemployment rates.

Read the full article in the Global Property Guide

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