Forecast for 2023: Housing prices in Cyprus

At the end of 2021, the economies of Europe and Cyprus began to gradually recover after two years of instability caused by lockdowns, record stock market growth, and inflation. A year later, the situation with supply chain disruptions became less severe (for example, the global container freight index dropped by 74% from $9,304 to $2,404), the stock market declined (for instance, the S&P 500 index fell by 19.5% from 4,750 to 3,800), and inflation seems to have peaked at around 8-9%.

The war in Ukraine and the associated geopolitical changes, the rapid shift of the EU away from Russia as a primary energy supplier, and the rise in interest rates have led to a significant reassessment of risks across various asset classes, particularly those with high levels of debt (such as real estate). This reassessment will continue in 2023, especially as increasingly attractive investment opportunities emerge.

Our analysis will be divided into two parts: defining the assessment system and its use for analyzing Cyprus. Higher disposable income, population growth, more lenient lending requirements, and lower interest rates contribute to the increase in housing prices. Similar to residential real estate, the price of commercial real estate tends to rise with GDP growth and decline when interest rates and yields on other investments are higher. International investors influence the price dynamics in both the residential and commercial real estate sectors.

Considering all of the above, let's look to the future regarding each of these factors for 2023. Due to inflation and rising interest rates, disposable income is likely to be lower. Credit conditions are becoming stricter, and mortgage, development, and investment rates are increasing. On the other hand, the population has significantly increased due to arrivals from Ukraine, Russia, Belarus, and other countries, leading to higher rents and housing prices in certain areas. The arrival of foreign investors, especially from Lebanon and Israel, is also driving up prices for certain types of real estate (mainly small residential units and tourist properties in Larnaca).

Regarding commercial real estate, GDP continues to grow, but with higher interest rates and increased yields on alternative investments, investing in real estate for income/capital appreciation is becoming less attractive (for example, the yield on a 10-year bond from the government of Cyprus is currently 4.2%, while banks in Greece and Cyprus are issuing preferred and Tier 2 bonds with coupons ranging from 7.0% to 10.0%).

All of the above indicates that the main factors driving the local real estate market in Cyprus are likely to be population growth, an influx of foreign investment, and limited supply (adding a significant amount of housing takes 2-4 years). The obstacles are a decrease in disposable income and rising interest rates. Due to these "stresses," it is reasonable to assume that a two-tier market is developing, as has already happened in Limassol and Paphos, where certain properties are built/targeted exclusively for foreign citizens. The key question here is whether these foreigners will continue to call Cyprus their "home" to maintain price stability in the medium term. The likely answer is yes, as the local business environment and political stability (in light of what is happening in the region) and the ability to "work from anywhere" play in favor of Cyprus.

It is important to emphasize how "limited supply" leads to rising prices, which is likely to change in the medium term with the emergence of new projects (especially in the western part of Limassol and in some areas of Larnaca). The construction of new homes has not fully recovered since the housing crisis of 2008 and the banking crisis of 2013, and the housing supply remains close to historical lows. This limited inventory has made housing inaccessible for many, especially for first-time buyers. Additionally, those who purchased homes in recent years at very low mortgage rates are staying put, further constraining the overall housing supply.

Demand has significantly influenced the population increase over the last decade (+85,000 from 2011 to 2021), the arrival of people from Ukraine due to the war (about 20,000 individuals), and additional inflows from Lebanon and Israel (these are not permanent residents - and therefore not counted - but they have purchased or rented property). This should be supplemented by the influx of investors in residential real estate, especially for short-term rentals (both for tourism and business travelers).

We do not expect a significant adjustment in the housing market in Cyprus, as the economy remains strong and the demand for housing is still relatively high.

We are less optimistic about commercial real estate, where the selection of alternative investment opportunities has significantly increased over the past year. This, combined with rising interest rates, is likely to lead to a reevaluation in the short to medium term, especially concerning smaller units and outdated properties.

The analysis of real estate prices ends here. For those who want to reflect on the future of Cyprus, it is interesting to draw parallels between the "Cyprus Dream" and the "California Dream" described in the Eagles' song "Hotel California." Both places attract people seeking sunshine, low taxes, and opportunities, but over time, the reality of these locations has not always lived up to initial expectations.

Cyprus seems like a beautiful oasis in a turbulent part of the world. Thousands of people have moved to Cyprus in search of sunshine, low taxes, and money, but many find that this dream is just an illusion. As the hotel night guard explains, "we are programmed to accept." In many ways, Cyprus has been "programmed to accept" from the very beginning. In 1990, when Cyprus began attracting Russians and others doing business in Eastern Europe, the "Cyprus Dream" was born - a dream of instant wealth waiting for its owner. Thousands of people came to the country, hoping and expecting to find a more business-friendly place. However, over time, most of them did not find it. The relaxed regulatory environment and friendly banks were removed, and it wasn't long before large investment groups took over certain sectors, while European regulations encompassed most of the country's institutions. Since 2013, most individual investors have transformed from independent "treasure hunters" into dependent service providers.

In a sense, false hope was built into the foundation of Cyprus from the very beginning. It's similar to what the Eagles found in California. Despite their connection to the state, none of the Eagles members were originally from there. According to Don Henley: "We were all middle-class kids from the Midwest. 'Hotel California' was our take on the high life in Los Angeles." As Cyprus transforms from a small closed community into a playground for international travelers and businesses, it's easy to look back through rose-colored glasses. However, I am sure that this rapid transformation will leave many behind and thus disrupt its social structure. Most people don't care, but I am not one of them.

About the author Pavlos Loizou, CEO, Ask WiRE