A look into the future2023: Housing prices in Cyprus

At the end of2021, the European and Cypriot economies were gradually recovering after two years of instability due to lockdowns, record high stock market levels, and inflation growth.

A year later, the situation with supply chain disruptions has become less critical (for example, the global container shipping index decreased by 74% from $9304 to $2404), the stock market has declined (for instance, the S&P 500 index fell by 19.5% from 4750 to 3800), 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 in those that are highly dependent (such as real estate). This reassessment will continue in 2023, especially as increasingly attractive investment opportunities emerge.

Creating an evaluation system and its use for analyzing Cyprus

High disposable income, population growth, more lenient lending requirements, and low interest rates contribute to the increase in housing prices. Similarly to residential real estate, the price of commercial real estate typically rises alongside GDP growth and decreases with higher interest rates and returns from other investments. International investors influence price dynamics in both the residential and commercial real estate sectors.

With all this in mind, let's take a look at the factors that will determine the dynamics of the real estate market in 2023. Disposable income is likely to be lower due to inflation and rising interest rates. Credit conditions are becoming stricter across the board, and interest rates on mortgages, development, and investments are increasing. On the other hand, the population has significantly increased due to arrivals from Ukraine, Russia, Belarus, and other countries, which has led to a rise in rental prices and housing costs in certain areas. The influx of foreign investors, particularly from Lebanon and Israel, is also driving up prices for certain types of real estate (mainly small residential units and tourist properties in Larnaca).

Counteraction

The countermeasures are a decrease in disposable income and an increase in interest rates. In this context of "tensions," it is logical to assume that a two-tier market will develop, as has already happened in Limassol and Paphos, where certain properties are being built and designated solely for foreign citizens. The main question here is whether these foreigners will continue to consider Cyprus their "home" in order 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, and this is likely to change in the medium term as new projects are announced (especially in Western Limassol and parts of Larnaca). The construction of new homes has not yet fully recovered from 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 unaffordable 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.

The demand side has been significantly affected by the population growth over the last decade (+85,000 from 2011 to 2021), the influx of arrivals in 2022 due to the war in Ukraine (about 20,000), and additional inflows from Lebanon and Israel (these are not permanent residents and therefore are not counted, but they are buying or renting property). Additionally, there is an influx of investors in residential real estate, especially for short-term rentals (for both tourists and business travelers).

We do not expect a significant adjustment in the housing market in Cyprus, as the economy remains strong and demand for housing is still relatively high. In fact, low supply and strong demand mean that a significant decrease in housing prices is unlikely in the near future.

The analysis of real estate prices ends here. For those who want to envision where Cyprus is headed, it’s interesting to compare the "Cyprus Dream" with the "California Dream" described in the Eagles' song "Hotel California." Both places attract people seeking sunshine, low taxes, and opportunities, but over time, the realities of these locations do not always meet the 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 an illusion. As the night manager of a hotel explains, "we are set up for reception." In many ways, Cyprus has been "set up for reception" from the very beginning. In 1990, when Cyprus began attracting Russians and other business people from Eastern Europe, the "Cyprus dream" was born - the dream of instant wealth that anyone bold enough could achieve. Thousands of people flocked to the country, hoping and expecting to find a more friendly place for business. However, over time, most of them were unable to find that. The relaxed regulatory environment and friendly banks disappeared, and it didn't take long for large investment groups to take over certain sectors, while EU regulations encompassed most of the country's institutions. Since 2013, most individual investors have ceased to be independent treasure seekers and have become dependent service providers.

In a sense, false hope was built into the structure 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 vision of 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 confident that this rapid change will leave many behind and, in turn, disrupt the social fabric of the country. Many may not care about this, but I am not one of them.

About the author Pavlos Loizou, CEO, Ask WiRE