Real estate: availability and housing market trends

Buyers are becoming more cautious and taking more time to make a decision. In response to rising interest rates, we have seen several budget adjustments among borrowers. In addition, real estate buyers now prefer more deliberate and thoughtful purchases. This means that the length of time real estate agents and real estate professionals need to help clients find the perfect home has increased.

Reduced lending and high interest rates

Cyprus saw a marked decline in new loans in April 2023, according to data from the Central Bank of Cyprus. New loans fell to €473.9 million compared to €922.5 million in March 2023. The decline affected various areas including consumer loans, home loans and loans to non-core companies. According to recent ECB data, Cyprus has some of the highest interest rates on loans in the eurozone. Specifically, the average mortgage interest rate is 4.45% in Cyprus, compared to 4.03% in the eurozone. For example, Greece has a rate of 4.06%, Spain 3.47%, France 2.99%, Luxembourg 4.11%, Malta 2.56%, Austria 4.06%, Slovakia 3.71% and Finland 3.62%. Given the expected downturn in demand that has become evident from the reduction in lending activity and reduced borrowing capacity with rising interest rates, this presents significant challenges to current price levels. This raises a reassessment of market dynamics and questions about the sustainability of current prices.

Stable construction costs

According to the Cyprus Statistical Service, the price index for building materials has remained relatively stable since the beginning of the year.

Increase in supply in the secondary real estate market is expected

The rise in bad loans is expected to cause real estate sellers to start putting their properties up for sale, resulting in an increase in supply. Especially those who have purchased real estate for investment may find themselves at a crossroads, pondering whether servicing the loan remains a viable option or whether liquidating the property will prove to be a smarter choice. GDP is also expected to contract slightly, putting pressure on the labor market, which in turn is quite likely to increase unemployment or at least cause some problems.

The supply of new housing is expected to increase

It is expected that there will be fewer building permits and projects, but more properties and large projects are expected to enter the market. According to the Cyprus Statistical Service, comparing January-May 2023 with the same period in 2022, all types of residential building permits decreased by about 9%. However, they increased by 3% in terms of area (square meters), by 3.5% in terms of number of units and by about 18% in terms of value. This upward trend in area and number of units can be attributed to the recent legislative changes in VAT reduction policies, which put restrictions on size (and value). As a result, developers have rushed to obtain valid building permits to ensure that their prospective mid-term projects are not affected by the new changes. An additional increase in value is due to rising construction costs. Overall, based on the data on permits issued from January to May 2023 alone, approximately 4135 new residential units are expected to enter the Cyprus market in the coming years.

Based on the above trends, it seems that prices are currently in the process of stabilization. This is expected to be accompanied by downward pressure, leading to a slight decline in nominal prices. However, it should be noted that if inflation remains at high levels and nominal prices remain stable for an extended period of time, "real" real estate prices will inevitably decline. In our opinion, this scenario seems to be the most probable.

About the author: Haralambos Pitros holds a PhD in Real Estate Economics and is a member of the Royal Institution of Chartered Surveyors (MRICS), the European Real Estate Society (ERES) and the Cyprus Chamber of Science and Technology (ETEC). He is a real estate lecturer at the American University of Cyprus (AUCY) and a real estate expert valuer at Zyprus Real Estate - Valuers and Real Estate Agents. This article expresses only the views of the author.