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Banking and real estate intertwined

Banking and real estateTHE STABILITY of the Cypriot banking system is highly correlated to the real estate sector as past and current lending practices of local financial institutions have amplified both the upturn and the downturn of the Cyprus real estate market.

On one hand, the large credit expansion of the years 2006-2008, especially in the real estate sector, was instrumental in fuelling the overheating of the property market during that period. On the other hand, when demand from domestic and foreign investors collapsed post 2008 and prices took a significant hit, the banking sector was faced with an unprecedented situation due to the skyrocketing of non-performing loans (NPLs) that were collateralised by real estate, resulting in extreme lack of credit, which in turn amplified the fall in demand for real estate.

To date, loan origination remains at extremely low levels and consequently the ability of buyers to buy property is limited and property prices remain depressed. This is what is often described as the “cyclical” effect of the lending criteria and policies employed by the Cypriot banks. It is obvious now that 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, including the lack of sophisticated systems of risk assessment and the lack of reliable data and information. But the main reason is that the continuous increase in property prices created a false sense of security in Cypriot banks, which in turn led to the rapid credit expansion in the island’s housing market. This is the classical myopic expectations view, which is one of the main factors driving cyclical movements in real estate markets.

These myopic expectations were among the main reasons that kept property prices increasing rapidly up to the Q3 2008, but also kept prices falling after the beginning of the global financial crisis as international investors stepped back in the side-lines expecting further deterioration of demand and prices.

The sharp decline in property prices and the depreciation of mortgaged properties has led to the significant deterioration of the loan portfolios of domestic banks and increased the credit risk and bank capital requirements. The shortage in the supply of credit by the banks has reduced the demand for properties by home buyers and investors alike, further reinforcing the downward trend in property prices.

The Central Bank of Cyprus (CBC) and the local banks have to consider the consequences of the property price declines and the re-pricing of their portfolios and adapt their policies accordingly. In order to do this in the most effective way, data for all mortgaged properties need to be collected and appropriately analysed. For example, using such tools, the geographical concentration and other characteristics of problematic properties/mortgages can be identified, allowing the risk assessment to the sale/ divestment of specific types of properties and specific areas.

The demand for properties has become more vulnerable to the fluctuations of 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 for assessing and evaluating prevailing market trends and possible future prices, however, prevents a correct evaluation of requests for mortgage loans. The funding decisions as a result, are primarily based on the prices of similar properties at the time of the loan request.

The experience from international markets indicates that property prices are subject to considerable fluctuations, which may or may not coincide with the “economic cycles”. Due to the strong link between credit availability and effective real estate demand, these fluctuations are amplified and become much more intense due to policies applied by credit institutions, when these are of cyclical nature. For this reason, monitoring recent trends and assessing most likely medium term movements in property prices should be of direct interest to the monetary and supervisory authorities. As the recent experience from the domestic financial crisis has shown, the sharp decline of property prices can have a severe impact on the banking sector and the real economy of the country. It is no surprise that under these circumstances 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.

Overall, the experience of the past seven years has shown that the banking and the real estate sectors in Cyprus are strongly interlinked and that the restoration of the health of the banking system is vital and necessary for the sustainable recovery of the real estate market. We expect that the passing of the foreclosure law will pave the way for the gradual recovery of the banking sector but also mark the beginning of the bottoming-out process in the Cyprus property market within the next 24 months.

Dr George Mountis is the Managing Partner of Delfi Partners & Company

T: +357 22 503152 | D: +357 22 503182
M: +357 99 494142 | F: +357 22 503113
E: gm@delfipartners.com


  1. Banking and real estate intertwined? Well of course they are, just as much as the next link in the chain – tourism and buyers.

    Tourists come, they like the culture, they decide to settle, they move for a perceived better quality of life.

    Property buyers don’t suddenly wake up one day in the UK, Sweden or Germany and think..”I know I will buy a home in Cyprus”

    So we need tourists to come to Cyprus, but with the fall in tourism comes a fall in potential customers. With the increase in the costs of living, poor crime figures, poor roadworks and public infrastructure comes a perception that this is not the Country for a better life.

    Property is only worth what some else is will to pay for it. At the end of the day the customer will dictate terms, and at the moment it is downwards.

  2. This is largely a series of statements of the blindingly obvious – but where other countries – notably Ireland, Spain, Portugal, Iceland – but also UK, Holland and others – ‘got stuck in’ to longer-term actions to deal with the massive impacts of ‘carefree’ lending by their banks – allied often to adventurous, capricious borrowing by their customers, who obviously thought, or were encouraged to think?, the Good times might roll on forever!

    Greece and Cyprus seemed to simply ignore the greed-driven, volume focused, impacts of their banks’ actions, 2000 – 2008, and – when the Crunch came, did virtually NOTHING. There was an almost total lack of action by these countries’ governments, regulators as well as banks, evidenced for instance by the fact that Cyprus only VERY recently agreed basic remedial methods (foreclosures, repossessions, ‘fire sales’ and the like) for dealing with the massive impacts of their previous greedy, inactions.

    AND YET, even today, (Cyprus News) we read that the Opposition are still faffing around, trying, supposedly, to protect anybody who can’t pay as well as those who can – but choose not to! – thereby causing the Inspectors (aka, until recently, ‘the Troika’) to withhold recent further sums of bailout monies which had fallen due.

    Glaringly fraudulent ‘ignorance’, more likely ‘avoidance’ of some of the most basic tenets of ‘good banking practice’ and ‘regulation’ led Cyprus into the financial and economic mess it is now in:

    The twin outrages of :

    1. The scandal of ‘developer mortgages’ institutionally being allowed to sit and rank ahead of buyer mortgages that had been arranged to finance the sales of the developers ‘finished’ (often badly finished!) products and …….

    2. The non-issue of Title Deeds to those who had been encouraged to believe they had ‘Good Title’ to their properties

    ……are gradually being exposed, with the effect that Cyprus’ awful reputation and horrendous track-record on ‘honest and open’ property funding are now being recognised not only in the EU but further afield in various parts of the world. Who that reads newspapers only occasionally cannot yet know what a largely corrupt scene the entire Cyprus property bubble represents, and how, even now Good Title is still frequently not passed to the end Property Purchasers?

    And we haven’t yet got to the unravelling of all this, as few if any, it seems ‘delinquent’ mortgages have yet been tackled by the Banks. Hence the massive NPLs!

    So, whilst Ireland is well on its way to sorting its problems, significant market upturns in property sales and values are being reported in both Spain and Portugal, little Ol Cyprus, once the jewel of the Eastern Med, and, according to the Sunday Times ‘one of the Best Countries to Retire to’ continues to dither and dally, some 7 years since the global Crunch began.

    Add the NPLs to all the unfinished and unsold properties littering this country and it’s hard really to see any ‘bottoming’ of the Cyprus Property Problems for at least another 3 to 5 years.

  3. As much as I agree with much of what is stated here I still find that the ‘rose tinted spectacle’ syndrome is still is at large. Yes there have been declines in property prices, some areas larger than others, but nowhere near to the levels which were required in order to trigger further investment or consideration in the sector. Understandably those who paid for domestic property at its unsustainable height do not want to take as much of a loss as the market insists they do and new developments are built on the high expectations of multi millionaire foreign buyers who by definition assuming not engaged in illegal activities will spend their money wisely and with forethought and an eye on the future.

    The 2004 / 05 general pricing structure was vastly and disproportionately inflated (with no justification) continually up to 2008’ish which when considering the infrastructure, environment, political and bureaucratic processes made further investment a no brainer. When paying CY£55K for a house in 2005 one could have forgiven the unmade road, no pavement, no street lighting and discarded building materials. Having to pay €350K for the same property in 2009 one would look very carefully at the wisdom of squandering hard earned money on a very poorly constructed and uninsulated product in a shoddy environment with unlikely prospect of securing title and balance that against sunshine. It was certainly no contest. Why would any sane individual do it yet prices continued to rise and now we have a plethora of multi million Euro homes the majority of which are foreign owned or at least owned by banks but occupied by foreigners. Is it sustainable? Is it good for the Cypriot people? Will it last? and more importantly who is going to suffer the consequences?

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