THE financial stability of the Cypriot banking system is highly correlated to the real estate sector as the lending criteria that the banks applied reinforced the real estate crisis.
The large credit expansion of the years 2006-2008, especially to the real estate sector, led to a real estate “bubble”. As a result, the real estate prices collapsed, causing a large increase in the non-performing loans (NPL) that were collateralised by real estate.
To date, loan origination remains at extremely low levels and consequently the ability of buyers to buy property is low and the property prices remain depressed. This is what I had described as the “cyclical” effect of the lending criteria and policies employed by the Cypriot banks during the boom.
Many times, particularly during the inexorable rise in property prices in the period 2004-2008, the banks in Cyprus “underestimated” the credit risks implicit in mortgage loans. This could be attributed to various reasons, such as the lack of sophisticated systems of risk assessment and the lack of reliable data and information. The main reason, however, is that the continuous increase in property prices created a false sense of security in Cypriot banks and led to further credit expansion.
This behaviour was one of the main reasons that kept property prices ever increasing, and led to the subsequent deterioration of the loan portfolios of domestic banks. Currently, the sharp decline in property prices and the depreciation of mortgaged properties increases the credit risk and the bank capital requirements even further. The shortage in the supply of credit by the banks, reduces the demand in properties, commercial investments etc., inevitably reinforcing the downward trend of real estate prices.
The Central Bank of Cyprus (CBC) and the banks themselves have to consider the consequences of the property prices decline and the restructuring of their portfolios and adapt their policies accordingly. In order to do this, collection of data for all mortgaged properties, as well as data analysis using statistical/ econometric models and cartographic tools are needed. Using such tools, they can, for example, calculate the geographical concentration of properties/mortgages, the risk assessment to the sale/ divestment of specific properties in specific areas, etc.
The purchase of properties has become more vulnerable to the fluctuations of the prices because of the banking system influence. Theoretically, the decision of granting a loan must be based on long- term projections regarding the future value of the financed property until the repayment of the loan. Also, the repayment ability of the borrower has to be assessed and seriously considered. The lack of adequate information on the evaluation of the prevailing market trends and the possible future prices, however, prevents a correct evaluation. The funding decisions as a result, are primarily based on the prices of similar properties during that period.
The experience from international markets indicates that property prices are subject to considerable fluctuations, which may or may not coincide with the “economic cycles”. Under certain circumstances, these fluctuations may be reinforced and become much more intense due to the credit policy applied by credit institutions, when this policy is of cyclical nature. In any case, monitoring the evolvement of property prices should be of direct interest to the monetary and supervisory authorities. As the recent experience from the domestic financial crisis points out, the sharp decline of property prices may have a significant impact on the banking sector and thus on the real economy of the country.
It is not a big surprise that both the authorities and the banks are reviewing their credit rating systems and their methods of monitoring mortgages/ properties so as to better manage their portfolios.
Dr. George Mountis
Director, Business Development
Emergo Wealth
Yesterday my barber was very upbeat about the economy. He said that the Cypriots had pulled through much worst than this, saying that they will survive because they were workers and had the forethought to ‘stash’ money under their mattress for rainy days rather than giving it to the taxman.
Well I said the cat is very much out of the bag. No more boom, just bust, as the whole World now knows about NPL being half the toxic assets of the banks.
But he was so upbeat. He knows Troika was just beating its chest, but would capitulate. So much positive vibes. I just wonder what he knew that I didn’t?
One of us was clearly on a different planet.
Blindingly obvious now, but not so just 6 years ago – when even the UK Sunday Times was rating Cyprus No.1 in the WORLD of Ex-Pat locations on a bundle of measures that included property (‘based on the UK Registry system, ha-HA), healthcare, not to mention low taxation of course:
Revealed: the best places in the world for retirement
Yes, Cyprus ahead of Panama, France and a host of others…..
Thankfully most of the low-taxation package remains for ex-pat pensioners – the sun still shines 320/365 days a year and the majority of Cypriots now drive on the Left…. but almost everything else has plummeted: Property values (still reeling), healthcare, national economy, bank stability to name but a few plus empty business units most everywhere and remaining banks still trying to figure out how to ‘get real’….
…… Whilst bank NPLs have rocketed to levels hardly seen anywhere else in a battered Club Med environment, and the evils of suspect lawyers, residual and preferential developer mortgages and crazy, crazy bank lending are yet, really, to be unravelled.
The Good Times are most certainly ‘long gone’ – but the blindingly obvious remedial actions are really yet to commence…..whilst a sense that MedGas might well be the island-states saviour prevails.
Another 5-10 years required’ I’d wager, even with a realistic and committed government, – have we got one? to get things back on a positive footing. The Troika will continue to huff, puff and cajole, allude to ‘things getting better’ but, seriously, can they?
More importantly will they?
Don’t hold your breath!
Mike I agree 101%, we first considered retiring to Cyprus on my retirement in 2008 way back in 1998, then we could have sold our UK 3 bed semi in Derbyshire bought a nice detached villa/bungalow and had a tidy sum of money left over, by 2008 we’d have had to take out a mortgage in Cyprus to buy anything other than a townhouse.
Thankfully we saw the way things were happening and changed our minds.
Anyone with any connection with Cyprus in the 60’s, 70’s, 80’s and early 90’s will tell you that all indicators are that greed and unprecedented rises in prices, fuelled by foreign buyers, is generally what has bought us to the current status quo.
Prior to the so called boom property was cheap, reflecting true value, real estate agents were a rarity and developers were basically building as required. I have long maintained that since 2003/4/5 prices have vastly over inflated and I still, despite reductions to date, maintain they are probably up to 50% overpriced in many areas especially where foreign buyers congregate. This has a trickle down effect and everyone starts increasing prices.
The bubble has or is bursting and we must return to some kind of sensible realism in order to move forward. Paying millions for Limassol seafront properties is ridiculous based on infrastructure etc. It is not Hong Kong, London or Moscow but obviously suits those who are paying. What happens next will determine the countries future I feel.
@Mike on 2014/08/05 at 9:19 am – My wife and I had been regular visitors to Cyprus since the early 1980s and can remember how things were then. We bought our plot of land in Erimi in 1992 (and got the deeds in 1996). At the height of the boom in 2007 similar plots of land in Erimi were selling for 10 times the price we paid!
At least with the decline in prices I’ll be paying less IPT? I was looking forward to the day when it would be based at zero.
Actually no, the decline in prices has made no difference to the valuation of my villa, which according to the Land Registry has actually gone up in value.
Very strange.
The Boom and Bust scenario in Cyprus will not change unless attitudes change with politicians and developers, they need to make difficult decisions, than sitting back and doing nothing.
1) Non performing loans(NPLs) i.e large reductions to mortgage payment and reductions in property valuations to satisfy people with mis-sold Cyprus mortgages.
2) Sort out Mortgage title deeds, reducing transfer fees for all, plus owners of properties not subject to any developers debts.
3) All Banks, developers,lawyers to learn by their mistakes, treat property owners with honesty and respect,apply a code of conduct by law to prevent again and again going down the same slippery slope.