Cyprus’ housing market strengthens

Lalaine C. Delmendo | December 18, 2018

Cyprus house pricesAfter eight long years of house price falls, Cyprus´ housing market is now gaining momentum, amidst robust economic growth. During the year to Q1 2018, the nationwide residential property price index rose 1.82% (2.32% inflation-adjusted), its fifth consecutive quarter of y-o-y rises, according to the Central Bank of Cyprus, and the biggest annual increase since Q4 2008.

On a quarterly basis, residential property prices rose by 0.57% (0.33% inflation-adjusted) in Q1 2018.

By district:

  • Nicosia, Cyprus´ capital, residential property prices rose by 1.24% during the year to Q1 2018 (1.74% inflation-adjusted)
  • In Limassol, prices increased 2.66% y-o-y to Q1 2018 (3.17% inflation-adjusted)
  • In Larnaca, prices increased 1.11% y-o-y to Q1 2018 (1.6% inflation-adjusted)
  • In Paphos, prices rose by 1.99% y-o-y to Q1 2018 (2.5% inflation-adjusted)
  • In Farmagusta-Paralimni, residential property prices rose by 2.87% (3.38% inflation-adjusted) over the same period

By property type, apartment prices increased 3.97% during the year to end-Q1 2018 (4.48% inflation-adjusted). On the other hand, nationwide house prices rose by 1.03% (1.53% inflation-adjusted) over the same period.

RESIDENTIAL PROPERTY PRICE INDICES (NOMINAL)

Apartments Houses
2010-2016 2017 Q1 2018 2010-2016 2017 Q1 2018
y-o-y q-o-q y-o-y q-o-q
CYPRUS -27.9 3.3 4.0 0.9 -25.5 0.9 1.0 0.4
Districts
Nicosia -24.2 3.0 3.8 0.7 -26.2 -0.2 0.0 0.5
Limassol -22.8 6.3 6.9 2.0 -23.4 1.6 1.2 0.3
Larcana -35.8 0.4 -1.0 -1.4 -30.4 0.3 1.4 0.2
Paphos -34.9 0.6 4.7 2.6 -22.3 1.1 1.2 0.1
Farmagusta -42.3 -0.4 0.2 0.6 -31.2 2.2 3.9 1.8
Source: Central Bank of Cyprus

Demand is now rising sharply. During the first three quarters of 2018, property sales in Cyprus rose by 21% to 6,706 units from a year earlier, based on figures from the Department of Lands & Surveys.

Likewise, the number of dwelling permits soared 23.5% y-o-y to 2,333 units during the first five months of 2018, according to the Statistical Service of Cyprus.

This across-the-board housing market improvement is partly driven by Cyprus´ strengthening economy. In 2017, the economy expanded by 4.2% – the highest growth in a decade, according to the Statistical Service of Cyprus. The economy is projected to expand by 4% this year, and by another 4.2% in 2019, based on forecasts released by the International Monetary Fund (IMF).

The Cyprus real estate market has historically been divided into the major urban centres of Nicosia, Limassol and Larnaca (primarily driven by local demand); and the seaside resort areas of Paphos and Famagusta, which are mostly driven by foreign demand. The economic decline of recent years affected both areas.

The housing market is expected to continue to improve in the coming months, amidst strong economic growth and improvements in the banking system.

Foreigners can buy one home in Cyprus, and are entitled to hold land freehold, but there is a maximum limit on land ownership of 3 donums (4,014 sq m).

Brief history of Cyprus´ housing market

Cyprus price index

Cyprus´ housing market started to decline in 2009, mainly due to the global financial meltdown, according to the Central Bank of Cyprus (CBC), after robust house price increases of 22.06% (17.96% inflation-adjusted) in 2007 and 9.73% (5.93% inflation-adjusted) in 2008.

House prices fell by 30% (32.3% inflation-adjusted) from 2009 to 2016.

Cyprus´ housing market started to stabilize in Q1 20017, amidst an improving economy. House prices rose by 1.52% (2.11% inflation-adjusted) in 2017.

HOUSE PRICES IN CYPRUS, ANNUAL CHANGE (%)

Year Nominal Inflation-adjusted
2009 -1.86 -3.83
2010 -3.57 -5.13
2011 -4.96 -8.55
2012 -4.71 -5.75
2013 -8.50 -6.34
2014 -8.02 -6.66
2015 -1.80 -0.84
2016 -0.94 -0.69
2017 1.52 2.11
Source: Central Bank of Cyprus

Residential construction activity rising, but still far below peak levels

In 2017, there were 4,939 dwelling units authorized in Cyprus, up by more than 35% from a year earlier, according to the Cyprus Statistical Service.

Cyprus dwellings authorized

During the first five months of 2018:

  • The number of permits issued for the construction of residential buildings rose by about 12.1% y-o-y to 1,842 units
  • The area of residential building permits surged 20.4% to 499,666 square meters (sq. m.) from the same period last year
  • The value of residential building permits increased 22.1% to €487.1 million (US$563.9 million) over the same period
  • The number of dwelling permits soared 23.5% y-o-y to 2,333 units.

From an average of 18,000 units authorized annually from 2004 to 2010, dwelling permits fell to under 5,000 units per annum from 2011 to 2017.

Property sales increasing, but still far below pre-crisis levels

In 2017, property sales in Cyprus rose by 23.7% to 8,734 units from a year earlier. But sales remain far below the pre-crisis levels. Sales were at an average of 18,000 units in 2002-2007.

Cyprus property sales

During the first three quarters of 2018, property sales in Cyprus rose by 21% to 6,706 units from a year earlier, based on figures from the Department of Lands & Surveys. Over the period, domestic buyers accounted for about 52% of the total sales while overseas buyers (both EU and non-EU citizens) accounted for the remaining 48%.

By major urban centres:

  • Nicosia registered 1,169 sales contracts in the first three quarters of 2018, up by 34% a year earlier.
  • In Limassol, property sales rose by 24% y-o-y to 2,488 units over the same period.
  • In Paphos, sales contracts increased 13% y-o-y to 1,578 units.
  • In Larnaca, property sales rose by 10% y-o-y to 983 units.
  • In Famagusta, sales contracts rose by 37% y-o-y to 488 units.

Interest rates remain low

Interest rates in Cyprus remain low, following European Central Bank (ECB) key rates. As of August 2018, the following average housing loan rates applied in Cyprus:

  • Interest rate fixation (IRF) of up to 1 year: 2.78%, slightly up from 2.71% in August 2017 but substantially down from 4.06% in August 2016
  • IRF over 1 and up to 5 years: 2.4%, down from 2.41% a year ago and 3.38% two years ago
  • IRF over 5 years: 2.87%, down from 3.15% in August 2017 and 3.32% in August 2016

Variable-rate mortgages now account for about 98% of all housing loans in Cyprus.

Cyprus interest rates housing loans

The ECB left its key rate unchanged at an all-time low of 0.00% in September 2018, after cutting it by 5 basis points in March 2016.  In previous years, banks in Cyprus have been slow to respond to ECB interest rate cuts, because there is little inter-bank lending, so banks rely on customer deposits for funding. Many banks pay high rates to attract deposits.

Mortgage market declining

Cyprus housing loans

New housing loans to households fell by 9.7% y-o-y to €71.7 million (US$83 million) in August 2018, according to the Central Bank of Cyprus. About 90% were pure new loans while the remaining 10% were renegotiated loans, with advances to local residents accounting for 91% of housing loans.

Likewise, total outstanding housing loans were down by 5.8% y-o-y to €11.8 billion (US$13.7 billion) in August 2018.

  • Housing loans to domestic residents dropped 3.7% y-o-y in August 2018
  • Housing loans to other euro area residents fell by 21.1% y-o-y in August 2018
  • Housing loans to the rest of the world fell by 22.9% over the same period

From 29.1% of GDP in 2005, the mortgage market grew sharply to about 91.32% of GDP in 2012. But it has contracted since, and was at 74.9% of GDP in 2017.

Rents rising sharply, but yields remain moderate

Cyprus rental yields

Average gross yields in Cyprus stood at 4.3% for apartments in 2017, up from 4% a year earlier, according to RICS. Over the same period, gross yields for houses were 2.2%, slightly up from 2.1% a year ago.

Nicosia and Limassol usually offer higher gross rental yields as compared to other Cypriot cities.

Cyprus house monthly rent

Across Cyprus, monthly rents rose by 13.7% for flats and by 8.2% for houses during 2017, based on figures from RICS. Residential rents are now at their highest level for five years.

In Nicosia and Larnaca, 120 sq. m. apartments are rented out for about €700 to €800 per month, according to Global Property Guide research conducted in August 2018.

Brief background of Cyprus’ property title deeds fiasco

Property frauds in Cyprus are a huge problem for expat homeowners, but also for developers, banks, and the government. Many buyers have lost their homes after the developer went bankrupt, despite having paid in full.

Developers tend to keep the title deeds, neglecting to inform house-buyers that their title deeds will be withheld for an unspecified time, or that the land on which their property is built has been mortgaged by the developer. The bank, which holds the title deed as collateral, has the right to foreclose, but, under normal circumstances, it may take a bank between 9 to 12 years to obtain control over the property. So banks extend and pretend, until the developer goes broke.

Between January 2005 and June 2008 a total of 37,769 overseas buyers purchased 29,949 properties for which Title Deeds had yet to be transferred, according to the Cyprus Department Land Registry report published in October 2008. This figure of 29,949 included properties for which Title Deeds had yet to be issued, plus those whose Title Deeds were in the process of being issued. During the same three and a half year period, 4,440 properties were transferred to 5,988 overseas buyers.

"Some cases have involved ´double selling´ fraud whereby the developer sells a property to Party A, fails to lodge the contract with the Land Registry, and then sells it again to Party B (possibly for a higher price) but fails to reimburse Party A," says Alan Waring, an international risk management consultant.

To resolve the scandal, a new directive on mortgage credit was adopted on January 28, 2014 by the Economic and Financial Affairs Council. Its new rules address some of the amazing problems in the Cyprus market, such as insufficient pre-contractual information, irresponsible lending and borrowing, and misleading advertising and marketing. The directive establishes regulatory and supervisory principles for credit intermediaries, and provisions to regulate and supervise non-credit institutions.

The new law sets out conditions for ensuring professionalism amongst creditors and credit intermediaries; principles for marketing and advertising; obligations relating to pre-contractual information; requirements for information on the borrowing rate; and requirements to check the consumer´s creditworthiness; and disclosure obligations for the consumer.

The government also introduced a number of incentives to homebuyers and sellers. Those who buy property in the country until the end of 2016 were qualified for a 50% discount on their Title Deeds transfer fees tax. They are not also required to pay capital gains tax when they sell the property in future.

The property title deeds fiasco however remains unresolved. According to European Commission´s Post-Programme Surveillance Report of spring 2017, at the current rate of Title Deeds issuance, it would take about ten years to address the backlog of unissued Title Deeds, which reached around 30,000 in 2017.

"The currently dysfunctional Title Deeds issuance and transfer system is deterring potential investors and thus weighing on the liquidity of the property market," said the European Commission. "Although some measures were taken to streamline the issuance of Title Deeds for new properties, no new measure was announced to provide for a sustainable system of transfer of Title Deeds."

´Trapped Buyers´ law - the mess continues

Recently, the Immovable Property Transfer and Mortgage Law (Amendment) (No. 10) of 2015, better known as the ´Trapped Buyers´ Law or the ´Hidden Mortgages´ Law, was passed to help property purchaser(s) to obtain a Title Deed,if they cannot obtain one despite having fulfilled their contractual obligations to the vendor.

The following can apply for Title Deeds:

  • The buyer who has yet to receive the Title Deed of the property he purchased
  • The vendor of the property, whether a private individual or a property development company
  • The lender who granted the loan to the property buyer
  • The mortgagee under the mortgage contract deposited at the Land Registry
  • The buyer who purchased the property thru assignment or vesting contract deposited at the Land Registry
  • The Director of the Department of Lands and Surveys ex officio

The ´Trapped Buyers´ law appeared to restore confidence in the housing market. Out of the 13,642 applications received as of end March 2017 linked to trapped property buyers, about 5,700 Title Deeds were issued, which led to around 2,000 transfers of titles.

However, following legal actions taken by banks against the transfer of titles, a court ruled in May 2017 that the new law is unconstitutional because it violates Article 26 of the Constitution, which affords individuals the right to enter freely into a contract.

As such, the land registry suspended procedures, as the government contemplated its next move.

In August 2018, the government announced a new draft bill that can finally resolve the problem. The new bill ensures that there is consensus among all parties from the beginning of the procedure so that an owner who bought a property in good faith and paid should obtain the title deed. The government plans to have the legislation passed by the end of this year.

Banking system improving

Cyprus unemployment

In 2012, Cyprus´ banking system collapsed. Like Iceland, Cyprus´ banking sector has long had a huge offshore banking sector. By 2012 the banking sector had assets of $120 billion in an economy with a GDP of only $24 billion, with $60 billion of these assets involving Russian corporations´ deposits. Cypriot banks had a hard time making a return on all this money, and their response was to raise loan risk-levels, lending to Cyprus´ local property companies, and to the Greek government, which in 2012 experienced the largest sovereign debt default in history.

In March 2013, Cyprus became the fifth Eurozone country to get a bailout from the Troika, composed of the International Monetary Fund, European Central Bank and European Commission. Cyprus was lent €10 billion (US$11.9 billion). Included in the agreement was a haircut for bank deposits of more than €100,000 (US$119,300) at the country´s two largest banks-Bank of Cyprus, and Cyprus Popular Bank (Laiki Bank).

The terms required Cyprus to cut public sector spending, hike taxes, and cut its bloated banking sector. The loss of confidence had an enormous impact on the local economy, combined with the decline in tourism largely resulting from the Eurozone crisis, and the downgrading of the Cypriot government´s bond credit rating to junk status.

Over the last four years, Cyprus has had impressive policy achievements, ending its IMF bailout program before term. Significant legal and institutional changes were introduced. The banking system is now on more solid ground. Unemployment has begun to fall. The economy is growing strongly.

Banking system solvency is also improving. NPLs were about 40.2% of total gross loans in 2017 – the lowest level since 2013. The reduction in NPLs can be attributed to increased repayments, restructurings, write-offs, and settlement of debt through swaps with real properties intended to be sold for faster cash collection, according to the central bank. The housing market recovery is also helping improve Cypriot banks´ asset quality.

In March 2018, NPLs in the Cypriot banking system dropped to €19.9 billion (US$23 billion), the lowest figure since December 2014, according to the central bank.

As a result, major credit ratings agencies have upgraded Cyprus’ rating in recent months.

  • In April 2018, Fitch Ratings upgraded Cyprus’ rating to BB+ from BB – just one notch below investment grade – citing the country’s strong economic growth and prudent fiscal policy.
  • In July 2018, Moody´s Investor Service upgraded the country´s long-term issuer rating from Ba3 to Ba2 with a stable outlook.
  • In September 2018, Standard and Poor’s raised the country’s sovereign bond rating to investment grade, more than six years after it had been downgraded into ‘junk’ territory.

Economic growth strengthens; unemployment falling

Cyprus gdp inflation

The economy grew strongly by 4.2% in 2017, the highest growth since 2007, thanks to strong domestic demand, according to the Statistical Service of Cyprus . Then in the second quarter of 2018, the economy expanded by 0.8% from the previous quarter and by 3.9% from a year earlier.

The economy is projected to expand by 4% this year, and by another 4.2% in 2019, according to the IMF.

Cyprus´ economy contracted about 1.8% in 2009, mainly due to the adverse impact of the global crisis. After registering anaemic growth rates of 1.3% in 2010 and 0.3% in 2011, the economy shrank again by 3.1% in 2012. The economy remained depressed in the following years, with a huge 5.9% contraction in 2013, and a 1.4% contraction in 2014, based on IMF figures. The economy recovered in 2015 with GDP growth of 2%.

Cyprus recorded a public budget surplus of 1.8% of GDP in 2017, a sharp improvement from a surplus of 0.3% of GDP in 2016 and deficits of 1.3% of GDP in 2015 and 9% of GDP in 2014, according to the Statistical Service of Cyprus .

Gross public debt declined to 97.5% of GDP in 2017, down from 106.6% in the previous year. However, gross debt is expected to rise again to 112.3% of GDP this year before falling to 105.1% of GDP in 2019, according to the IMF.

Inflation accelerated to 3.1% in September 2018, up from 2.5% in the previous month and the highest level in more than six years, according to the Statistical Service of Cyprus.

Unemployment fell to 7.5% in August 2018, down from 7.6% in the previous month and 10.5% a year earlier, according to the Eurostat. It was considered as the largest annual decline in unemployment in the EU during the period. From an average of just 4.8% from 2000 to 2011, unemployment surged to an average of 13.8% from 2012 to 2017, according to the IMF.

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