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Housing market in Cyprus

An insight into the island’s property sector and housing market are contained in ‘The Economic Adjustment Programme for Cyprus’, recently published by the European Commission.

A PAPER recently published by the European Commission entitled “The Economic Adjustment Programme for Cyprus” provides an insight into the findings of the troika delegation out of which came the Memorandum of Understanding for the island’s bailout.

The paper contains several references to the property and construction sectors, the most significant of which is reproduced below:

Housing Sector

THE HOUSING market in Cyprus is of particular importance for both financial stability and fiscal sustainability, as it poses a serious risk to bank balance sheets.

The housing boom was accompanied by a rapid increase in loans to households (Graph 13a) and non-financial corporations up to 2008, leaving the Cypriot private sector the most indebted (in relation to the country’s GDP) among the euro-area Member States (on a par with Ireland). Indeed, loans amounting to 150% of GDP in 2011 were directly related to the domestic housing sector, with even more consumer and business loans collateralized with real estate.

The due diligence of the Cypriot banks has established that, in many cases, banks put a greater weight on collateral than on cash flows of the borrowers. Loans to residential developers and the construction sector exceed 50% of GDP in 2011, with more than half of them already having been rescheduled (estimate). Thus, an important part of bank balance sheets hinged on assets related to local house prices, which were experiencing protracted adjustment after a long boom.

In real terms, real house prices saw a downward correction by ca. 28% (in Q1 2012) from their peak values in Q1 2008 (Graph 13b)1.

EC graphs Cyprus housing market

Regulatory factors influence the scale and pace of house price adjustments

Moreover, supply and demand factors indicate that prices are set to undergo a further substantial decline, in particular prices for holiday homes. The pace of the house price decline will crucially depend on the amount of loan rescheduling and the efficiency of collateral seizure.

Repossession procedures are in turn affected by both the backlog of the land registry system (title deeds) and considerable delays in asset liquidation administration and judicial procedures.

Furthermore, the housing market will be affected by fiscal consolidation efforts via the rationalization of the existent myriad of housing assistance schemes and the implementation of a recurrent property tax system based on updated valuations of the tax base.

Collateral seizure is in turn influenced by both the backlog of the land registry system (title deeds) and considerable delays in asset liquidation administration and judicial procedures. Improving these settings would result in a more rapid supply increase and a swifter decline in house prices, and accordingly in earlier price stabilization.

The potential advantages of a swift decline in house prices would be: front-loading of mortgage book valuation losses, earlier restoration of confidence in the housing market and thus a pick-up in (external) demand, with a positive feedback to GDP growth. The risks lie mainly in front-loading effects on the economy and the risk of undershooting house prices and thus collateral values.

Registration and transfer of immovable property

In 2011, up to 120,000 – 130,000 properties lacked title deeds, i.e. the land registry does not reflect their building and ownership situation. Scattered evidence on the progress since 2011 indicates that only a rather small portion of pending cases have been resolved so far.

This regulatory issue creates a bottleneck for the housing market in two respects:

First, it acts as an impediment to demand, particularly from foreigners, as they are not able to fully enjoy the benefits of ownership (for instance, deeds are generally required as proof of mortgage collateral).

Second, there is a risk element for the bank mortgage books, as it is not clear how many (developer) mortgages are secured with title deeds that are actually outdated and should be replaced with new title deeds to be transferred to dwelling purchasers. This is compounded by the fact that a sales contract on immovable property represents a senior claim on the property for the amount that has already been paid, thus giving the buyer a secured creditor position.

Against this backdrop, the Parliament approved substantial reforms in 2011 (N81(I)/2011). The new framework introduced vested contracts, enabling the sale of a property without a deed, and provided purchasers and authorities with the rights to request, and enforce, the issuance of title deeds.

The approval of planning and building permits as a necessary prerequisite for the issuance of title deeds was identified as a major driver of the title deeds backlog, and has been tackled by the introduction of simplified approval procedures and a town planning infringement amnesty in 2011.

However, the effectiveness of these reforms hinges on their implementation in expediting the issuance of the more than 100,000 still-outstanding title deeds. Preliminary figures suggest this measure resulted in a substantial, but by far non-exhaustive, decrease in the title deeds backlog. Note, however, that any new title deeds issued still have to be transferred to the purchasers, which poses further risks for sales contracts concluded before 2011.

Improving judicial incentives in order to ensure speedy title deed transfers is therefore a crucial aspect in resolving regulatory risks to house prices, banks, and the economy.

1 Note that this figure is based on the harmonized Eurostat house price index. Data from the Central Bank of Cyprus indicate that decline was less steep, and closer to 15% between Q3 2008 and Q2 2012.

Further reading

The Economic Adjustment Programme for Cyprus – May 2013

Readers' comments

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  • kufrahdog says:

    @ Nigel – thank you for your reply at post 7 Aug 13 @ 3:19 pm, which clarifies the issue for me.

    Everyone will appreciate that the population that has property issues can be sliced and diced ‘ad infinitum’, so that under present legislation there is no one answer that will fit all situations for all people in the affected population; and there seem to be very few answers that will deliver proper justice. For these reasons it is immensely difficult to comment precisely on individual cases on this site.

    Yes, it is a veritable nightmare, but one that we must strive to overcome. Thank you, again, Nigel. KD.

  • @kufrahdog – maybe it was a simplification to use the term ‘unsecured creditor’ as buyers will have a claim on the property they have purchased through the deposit of their sale agreement at the Land Registry.

    However, to give you some idea of what ‘security’ that gives buyers is demonstrated by correspondence I’ve received from someone whose developer is bankrupt and the court has appointed a liquidator.

    Even though many of these people have paid for the property in full, the costs involved in securing ownership of the properties is significant!!!

    In addition to paying the liquidator 11% of the price they paid for their properties, they will have to settle the developer’s debt with the bank – and pay any taxes he owes!

    Then they will have the ‘memos’ (other debts) to deal with using their lawyer. These memos can only be removed if:

    • The debt is repaid.
    • The creditor removes the memo.
    • A court issues an order for their removal

    It’s a nightmare!

    An order for Specific Performance isn’t going to help.

  • kufrahdog says:

    @ Nigel re your post on 4 Aug 13 at 7:57 pm. Please clarify a point. You said that if one’s contract of sale pre-dates the Specific Performance law effective 29 Jul 11 one is termed an ‘unsecured creditor’. But can an ‘unsecured creditor’ convert his status to ‘secured creditor’ by successfully obtaining a court order for specific performance under the 29 Jul 13 Specific Performance law?

    Given the way the title deed / property / banking issues appear to be moving under pressure from the MoU such a change of status, if it is possible, may be important when the chips are down and repossession raises its ugly head. I and perhaps others would welcome your further comment. KD.

  • Andrew says:

    There was I sensing a glimmer of hope. Considering how few homes have been sold since July 2011, the dubious honour of becoming a secured creditor will be a rare award indeed. Slowly slowly catchy monkey eh!

  • @All – It isn’t particularly clear in the article, but upgrading the status of a buyer to a ‘secured creditor’ came into effect when the ‘new’ Specific Performance law came into force on 29th July 2011.

    For contracts dated prior to that date, buyers are treated as ‘unsecured creditors’.

  • Steve says:

    The statement that a sales contract on immovable property represents a senior claim on the property for the amount paid is news to me, having read of banks’ threatening to enforce court orders on properties with developer mortgages where the developer goes bankrupt. In many cases, these senior claims must be greater than the current value of the property, so nothing left for the banks – small wonder they wanted to keep them on the balance sheet!

  • jon frazer says:

    I am puzzled by the last two lines of the above report- “Improving judicial incentives….”

    Can anyone suggest whether this is pro-buyer or pro-developer?

  • andyp says:

    The only problem Andrew, as I understand it, is that as a secured creditor rightful home owners are likely to get nothing and lose their homes.

    I can see what is coming and many of us have said so for years. These crooked and culpable bankers will be asking the rightful home owners to pay off their crooked developer’s debt and no doubt not even at the written down value.

  • Andrew says:

    “Second, there is a risk element for the bank mortgage books, as it is not clear how many (developer) mortgages are secured with title deeds that are actually outdated and should be replaced with new title deeds to be transferred to dwelling purchasers. This is compounded by the fact that a sales contract on immovable property represents a senior claim on the property for the amount that has already been paid, thus giving the buyer a secured creditor position.”

    Many years after paying for their homes in full hapless buyers are at least being recognised as secured creditors. I wonder if buyers will get a refund of the difference in their property value after devaluation.

  • Martyn says:

    Good that this has surfaced and is being given wider distribution.

    It simply confirms what many have been saying on this Forum for quite some time: a collision of potentially fatal and over-lapping factors in land development, banking, legal and government/regulatory (Cyprus and Eurozone) has, partly through years of Denial in Cyprus, now created what might well soon become the ‘Perfect Storm’.

    We need only to look at Chart 13b and see what happened in Ireland, another small country far too reliant on finance, banking and property – but one which was relatively ‘quick off the mark” in tackling its horrendous economic and property problems after the Credit Crunch occurred. Its property markets plummeted whilst banks, lawyers, borrowers, advisors, politicians worked reasonably effectively together to genuinely face up to the horrendous problems, strive towards repairing the damage and rebuild more robust overall control mechanisms for the future. And that is a country which had considerably tighter, better developed legal, banking and financing processes than Cyprus in the first place.

    In Cyprus the ‘turnaround’ has really not yet begun and with the Mediterranean culture of ‘manyana’ and a government yet to properly focus on – and Action! – remedial programmes , we can surely expect property values to fall still further before any ‘green shoots’ of recovery can appear.

    IF (still a Big IF in my view) the fundamentals are properly addressed and new systems, controls implemented then it may be that a Recovery (in the Cyprus economy and property markets) may start in about 5 years time to show results – just as the ‘hoped’ and doubtless ‘prayed’ for benefits of Cyprus’ MedGas start to come on-stream, themselves likely adding new impetus to a much more robust and stable future development of a better governed and managed Cyprus. We can but Hope!

  • The views expressed in readers' comments are not necessarily shared by the Cyprus Property News.

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