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Law of supply and demand will take care of prices

The law of demand and supply will take care of rental and sale prices of property much better than politicians would ever do. The market will adjust to the new economic conditions.

EXTENSIVE coverage was given to the fall of rental and sale prices of property in the first two quarters of this year, reported by RICS (Royal Institution of Chartered Surveyors).

The property bubble financed by easy bank credit, which saw real estate prices soar to absurd levels has been deflating in the last couple of years, the only surprise being the slow rate at which this has been happening.

It appears the rate of decline of prices would be slower than was initially expected and the correction of the market would take longer to be completed. This is because the banking sector is still in disarray and there is uncertainty about its future, not to mention the capital restrictions. These factors are slowing down the correction, but once the banks start to sell off collateral used as security for loans that are not being repaid, property prices would go into free-fall, until they are at a level that is attractive to speculators with cash.

Press reports yesterday suggested that Central Bank restrictions on real estate purchases would be lifted next week.

The difference from the stock market bubble of 1999 is that real estate will always have some value, in contrast to shares, and would eventually appreciate. On the minus side the collapse in property prices would have much more far-reaching consequences than the stock market crash, as it would drastically restrict the ability of businesses to secure loans – if and when bank credit is available – and impose big losses on people who borrowed money to invest in property.

The news made a mockery of political party plans to impose a 20 per cent reduction on the rents of shops which fell by nine per cent in the first quarter of this year and by 12 per cent in the second quarter.

So the 20 per cent reduction of rents had already taken place; a reminder that the market takes care of prices much more effectively than meddling politicians pandering to potential voters. Rents, particularly for commercial properties, will keep falling as the economy contracts and more companies go out of business.

The law of demand and supply will take care of rental and sale prices of property much better than politicians would ever do. The market will adjust to the new economic conditions.

But in Cyprus it seems that everyone is a supporter of free market rules when prices and profits are going up, opposing all regulation (like tighter credit which would have limited the scale of the property bubble) but when the inevitable downturn arrives they want to impose controls the market.

Cyprus property prices

Readers' comments

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  • kufrahdog says:

    @ Michael Thomaides – agreed, but one doesn’t see any signs from those who hold power that they are thinking this way. The cultural mindset must be changed first before any material change for the better can be implemented. KD.

  • Michael Thomaides says:

    We should impose the Swiss Model with tight regulations on property dealings: creates fall in supply and increase in demand.

    We are far too lax in who we let into the property business. The authorities must restrict the property market via indirect legislation (estate agent qualifications, tighter building regulations, scrutinizing buyers & setting criteria, etc).

    You will say this is impossible in Cyprus. Now probably – yes.

    Then lets do the next best think – look at what the Maltese are doing. They have not been touched by the recession.

    Cyprus is bigger and much a much more diverse destination – the potential is there. Political incentives and directives are needed.

    Michael Thomaides

  • Richard says:

    But who will ‘take care’ of the banks, developer’s and lawyers whilst this “natural correction” takes place?

  • Martyn's says:

    Politicians and Central Bankers can try hard to massage, influence, manipulate property markets, values but as the headline says supply and demand will generally (significantly) influence the ‘direction of travel’ and the ‘rate of flow’. But when you get such a slew of extremely negative factors as Cyprus has encountered over recent months how can anybody be in any way optimistic about the immediate future? A few thousand optimistic and progressive Chinese maybe – and the Minister in his ‘measured’ comments about the Limassol Marina development, it is grand in concept and, it seems, interpretation but only time will tell, and I suspect a lot longer than 2014, whether its ‘great expectations’ can be realised.

    Cyprus needs projects like LM but is still encumbered by the ongoing Title Deeds conundrum, bank failures, lack of fundings, not to mention high management, maintenance and escalating IPT costs – and of course the extreme international negativity on Cyprus that has been generated during the first 7 months of this year.

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