The rise in interest rates threatens real estate sales.

Thousands of borrowers are suffering from rising interest rates, as their monthly mortgage payments increase by hundreds of euros, causing concern in the real estate market.

Given the indicators that the European Central Bank will continue to raise interest rates to combat inflation, concerns about a downturn in the real estate market are growing.

Since July, the ECB has raised interest rates by three percentage points and has already hinted at another increase of 50 basis points (half a percent) before the board meeting on March 16, while markets are now anticipating further increases of up to 75 basis points by the end of summer.

In fact, the increase led to a rise in monthly mortgage payments by several hundred euros. The average mortgage interest rate in July was 2.5%, while the maximum could reach 3%. Thus, in the summer, if someone took out a loan of 200,000 euros for a term of 20 years, their monthly payment would be 1,060 euros.

However, since the ECB raised rates, mortgage rates now range from 5.5% to 5.75%. Given that most mortgages are taken out at a variable rate, adjusted by the market, the monthly payment on a loan of 200,000 euros has increased by 345 euros. With an additional increase expected in mid-March, the overall interest rate will be between 6% and 6.3%, which means the increase will exceed 400 euros, bringing the monthly payment close to 1,470 euros.

This puts additional pressure on households struggling with high inflation rates, while young couples just starting their lives are contemplating taking out a mortgage.

A positive trend in the real estate market

Speaking with Financial Mirror, real estate consultant from the Danos/BNPRE group, Eleni Averkiou, noted that the rise in interest rates is occurring during a market acceleration, creating a positive trend. She mentioned that real estate agencies are already observing a decrease in demand in the real estate market due to rising inflation and interest rates.

“After the lifting of COVID-related restrictions, we see the market coming back to life, mainly due to local demand and foreign companies and their employees moving to Cyprus and looking for housing and office space,” said Averkiou.

Danos believes that the market is still on the rise, thanks to locals and foreigners who have money in their pockets. "This source of buyers will soon run dry, leaving the industry searching for customers, while we see that new local buyers are becoming more hesitant to enter into loan agreements with banks. "We are also seeing a shift towards smaller apartments and houses, which helps the industry maintain stability during this difficult period," said Averkiu.

Consultant Danos noted that banks are trying to be helpful by processing loan applications as quickly as possible, and in the case of good-faith borrowers, a better interest rate may be on the table. She believes that authorities should intervene and take measures to help unlock the sector.

Averkiu said that the only thing the authorities should do is find ways to balance the negative impact of interest rates on households. "Interest rates and the cost of living are rising, while wages have not changed for several years.

She suggested that the government consider a one-time subsidy to help families purchase their first home. "This could be combined with projects to revitalize city centers, such as the center of Nicosia, suburbs, or even rural areas."

Issues with problematic loans

Although the development of the situation raises concerns for the real estate sector, economists do not believe it could create another wave of troubled loans. Ioannis Tirkides, the chief economist of the Bank of Cyprus, argues that the financial data is different from what it was in 2013, when the banking crisis occurred.

He said that housing affordability is a function of changes in income, housing prices, and interest rates, which determine the cost of servicing debt. "Given the rise in interest rates and the decrease in real income due to inflation, affordability is declining. "As a result, the demand for loans will be negatively affected. "But this does not mean that issues with troubled loans will significantly increase in both the household and business sectors," Tirkides said.

He claims that several factors make the current credit situation much more manageable than in previous years and certainly more so than during the "bubble" years before the crisis hit. "The economy is much larger than it was ten years ago; loans from residents are much lower in absolute terms and relative to GDP, which is true for both businesses and households. "What is even more important, especially for the business sector, is that the cost of servicing their debts is significantly lower than ever before; the employment level will remain high even with a weakening economy."

He added that the income level in the economy today is 40% higher than it was ten years ago, while resident loans account for less than half in absolute terms and less than a third in relation to GDP. "Resident debt in relation to GDP was 80% at the end of December 2022 compared to 270% at the end of December 2012."

The economist said that despite the economic slowdown, the employment level is expected to remain relatively high, starting from a position of labor shortage in many areas, which supports purchasing power. "We can expect some increase in troubled loans, but I wouldn't anticipate that this will become a serious issue in the context of the economic slowdown we expect, even in the case of a modest recession that is not foreseen."