Real estate market: supply and trends

Buyers have become more cautious and are spending more time making decisions. In response to rising interest rates, we are seeing some budget adjustments among borrowers. Additionally, real estate buyers currently prefer more thoughtful and considered purchases. This means that the duration of support from real estate agents and specialists during the search for the perfect property has increased.

The decline in lending and high interest rates. In April 2023, Cyprus faced a significant drop in new loans, according to data from the Central Bank of Cyprus. New loans decreased to €473.9 million, compared to €922.5 million in March 2023. This decline affected various sectors, including consumer loans, mortgage loans, and loans to non-permanent financial companies. According to the latest data from the ECB, Cyprus has some of the highest lending rates in the eurozone. In particular, the average interest rate on mortgage loans is 4.45% in Cyprus, compared to 4.03% in the eurozone. For comparison, Greece has 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 decline in demand, evident from the reduction in lending activity and the fact that borrowers' capabilities are decreasing as interest rates rise, this poses a significant challenge for current price levels. It raises concerns about the market dynamics and questions the sustainability of existing prices.

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

An increase in the supply of the secondary real estate market is expected. It is anticipated that the rise in overdue loans will compel property sellers to put their assets up for sale, leading to an increase in supply.

Particularly, those who purchased real estate for investment purposes may find themselves at a crossroads, contemplating whether maintaining the loan is a viable option or if selling the property would be a more sensible choice. It is also expected that GDP will slightly decline, which will add pressure to the labor market and, in turn, lead to an increase in unemployment or at least create certain challenges. As a result, along with a decrease in household purchasing power, an increase in supply in the secondary real estate market and heightened motivation among existing owners to sell is expected in 2023 and into 2024. However, it is anticipated that the supply in the secondary real estate market for funds will remain stable.

An increase in the supply of new housing is expected. It is assumed that there will be fewer building permits, but an increase in the number of properties and larger projects in the market is anticipated. According to the statistical service of Cyprus, comparing January-May 2023 with the same period in 2022, all types of building permits for residential buildings decreased by about 9%. However, they increased by 3% in area (in square meters), by 3.5% in the number of units, and by approximately 18% in value. This trend of increasing area and number of units can be explained by recent legislative changes regarding VAT reduction, which set limits on the size (and cost) of properties. As a result, developers rushed to obtain valid building permits to safeguard their projected medium-term projects from new changes. Additionally, the increase in value is related to rising construction costs. Overall, based solely on the data on permits issued from January to May 2023, it is expected that around 4,135 new residential units will appear in the Cyprus market in the coming years.

Conclusion. Based on the aforementioned trends, prices are currently in the process of stabilizing. It is expected that this will be accompanied by downward pressure and a slight decrease in nominal prices. However, it is important to note that if inflation remains at high levels and nominal prices remain stable for an extended period,"Real" prices for real estate will inevitably give way.In our opinion, this scenario seems the most likely.