Cyprus housing market slump continues
April 24, 2012
Cyprus property prices continue to decline, the house price boom having halted in late 2008. At end-2011, Cyprus house prices were 14.5% down on their Q3 2008 peak (-20.5% in real terms), according to the Central Bank of Cyprus (CBC). This year the housing market is expected to suffer yet more, due to the recession.
Cyprus’ residential property price index fell 5.61% during 2011 (-8.87% in real terms). Apartments suffered a 7.2% price drop, while house prices fell 4.7%.
Famagusta had the largest price drop among Cyprus districts, falling 10.7% during 2011, followed by Larnaca (-8.8%) and Paphos (-8%). Nicosia had the lowest price fall of 2% during the same period, according to CBC.
Nicosia’s average house price fell 3.19% from €511,642 in Q4 2010, to €495,341 in Q4 2011, according to the Royal Institution of Chartered Surveyors’ (RICS-Cyprus) price index.
Sales continue to decline, despite government efforts to provide more consumer protection for homebuyers. Domestic sales declined 13% April to April 2012. Sales were down in all districts except Paphos, according to the Department of Lands and Surveys.
Although revenue for tourism increased in 2011, overseas property sales still fell 21% y-o-y, from 151 contracts to 119 in April 2012, because of the ailing UK economy (70% of all foreign buyers are British) and Cyprus’ tarnished reputation for questionable Title Deeds.
The European Commission has forecast a 0.5% contraction in Cyprus’ GDP in 2012. University of Cyprus Economic Research Centre experts see a contraction of 1.5% to 2% in 2012.
Housing market scandals
Property scandals have hit epidemic proportions in Cyprus, involving fraudulent transfers of property, the deliberate withholding of Title Deeds, and an across-the-board amnesty for development projects of dubious legality.
Title Deeds (or "Certificates of Registration of Immovable Property") are legal documents all property owners in Cyprus are required to possess. Many buyers dispensed with them in order to avoid the payment of Property Transfer Fees which, as of May 2012, is calculated as follows:
|3%||on the first €85,430|
|5%||on the next €85,430|
|8%||on the remainder|
Source: Cyprus Property Law
The difficulties involved with not having a Title Deed, however, are myriad. Technically one does not own the property, despite having paid for it in full. The legal owner (the one who actually holds the Title Deed) retains the right to mortgage the property without the consent of the buyer. If the land was already mortgaged before it was sold, the legal owner can extend or increase the mortgage without consent.
Around 40,170 foreign buyers’ properties were caught in this Title Deed trap by the end of November 2011, according to the Department of Lands and Surveys. Out of 51,654 properties purchased by non-Cypriots from year 2000 to November 2011, title deeds have been transferred on only 11,484, and the gap between the number of properties sold to foreigners and Title Deed figures continues to widen.
The most insidious problem is unscrupulous property developers extorting money and claiming it as payment for "immovable property tax". This has attracted the attention of the European Union, spurred by a rising number of complaints from overseas buyers frustrated with a lack of consumer protection from developers who sell property without the proper permits and permissions—or, in one well-documented case, sell the same property twice.
The Town Planning Amnesty law
The government passed a “Town Planning Amnesty” law in April 2011, allowing illegally built properties and properties suffering from planning infringements to apply for Title Deeds. This was actually four bills to increase consumer protection.The new planning amnesty laws:
- Require the developer to move towards securing Title Deeds for his customers and carry out necessary things to ensure the Deeds issuance in a timely manner.
- If a property has been completed to specification and has no planning irregularities, the project architect may file plans for a division.
- Major planning irregularities should be corrected, if there are any.
- The buyer or developer can submit a form of intent to go through the “planning amnesty” process if there are minor planning irregularities by October 8, 2011.
- Providing that any planning infringements fall within the scope of the amnesty provisions, the applicant will be able to apply for a ‘Certificate of Final Approval’ – necessary in the process of Title Deeds issuance
- Depending on the nature and extent of any infringements, a fine may be payable.
- If there is a major planning infringement, it will result to an issuance of a Title Deed containing a statement about the offending part of the property. Depending on its severity, the statement may allow its sale as long as certain conditions are met, or worse, prevent the sale of the property.
Included in the planning amnesty is an immovable property sales law, which effectively gives the property owner a land contract, and removes his liability for the developer’s bad debts.
The government has also reduced VAT for first-time buyers, cutting VAT on homes up to 275 sq. m. to 5%, from the previous 15%.
Natural gas discovery
In December 2011 a gas field was discovered off the coast of Cyprus by Noble Energy Inc., involving 5-8 trillion cubic feet of natural gas in a field covering 40 square miles. The gas find was dubbed as “historic” by Cyprus President Demetris Christofias, and is worth tens of billions. It could provide the Island with electricity for 210 years according to Commerce Minister Praxoulla Antoniadou. Shortly after the discovery, Noble Energy announced plans to build a gas terminal in Cyprus.
Turkey has however already announced that it wants its share of the gas deposits. In September 2011, Turkish Prime Minister Tayyip Erdogan demanded that Cyprus postpone offshore drilling, and warned that he would send warships. Yet despite the possibility of conflict, the Government of Cyprus remains committed to the project. “Cyprus is in a position to strengthen the energy security of the EU as we are the only country in the region [with gas] that belongs to the EU,” said Antoniadou.
Low rental yields
Rental yields in Cyprus are low, compared to yields overseas, according to RICS-Cyprus. Average gross rental yields in Q4 2011 were around 3.8% for apartments, and 2% for houses. This parallels Global Property Guide research of January 2011, which found yields ranging from 2.7% to 4.6%. Larnaca has the highest yields, ranging from 4.54% to 4.76%.
Costs of buying a 120 square metre (sq. m.) apartment in Cyprus:
- Nicosia: average price: €1,646/ sq. m. Rental yield: 4.35%.
- Limassol: average price €2,140/ sq. m. Rental yield: 4.10%.
- Paphos: average price €1,780/ sq. m. Rental yield 2.71%.
- Larnaca: average price €1,330/sq. m. Rental yield 4.54%.
Tight credit market
Tighter credit standards were implemented by Cypriot banks during the first quarter of 2012 as a precautionary measure. In February 2012, the average lending rate for loans up to 1 year increased to 6.76%. The interest rate for loans from over 1 and up to 5 years was raised to 7%, and to 5.14% for loans over 5 years.
Variable-rate mortgages account for 97.8% of all housing loans in Cyprus, making the market vulnerable to interest rate shocks.
Cyprus’ interest rates are now among Euro area’s highest, and are relatively high In comparison to ECB rates (see chart below). Banks in Cyprus have been slow to respond to ECB interest rate cuts, and there is a big margin between the Central Bank key rate and their interest rates. That is because there is little inter-bank lending, so banks rely on customer deposits for funding. Many banks pay high rates to attract deposits, according to finance minister Makis Keravnos.
The adoption of the Euro in January 2008 led to a significant change in the method of calculating interest rates (from May 2008), and the data are now harmonized to the European Central Bank’s requirements.
Mortgage loans have grown significantly from 7% of GDP in 2005, to 62% of GDP in 2009. However, growth slowed down in 2010 and 2011, with 64% and 63% of GDP, respectively.
Economic contraction in 2012
Cyprus’ GDP declined by 1.9% in 2009, but the country rebounded from recession with growth of 1.1% in 2010, and 0.5% in 2011. But since then Cyprus has suffered from Greece’s economic troubles, from its mortgage and corporate lending slowdown, and from increased electricity costs due to a power plant explosion. Cyprus’ unemployment has already risen to 10% in March 2012, from 6.9% in March 2011. Meanwhile, Cyprus’ annual inflation slightly declined, to 3.1% in April 2012.
Cyprus’ economic decline is likely to continue in 2012.
Recent bad news has included:
- A country credit rating cut in May 2011, from AA- to A-, by Fitch
- Cyprus’ top three banks were downgraded by Moody’s in November 2011
- Cyprus government’s bond ratings were cut by Moody’s to junk status in March 2012, from Baa3 to Ba1, and put on negative outlook.
In coming up with this decision, Moody’s considered ”the increased risk that the Cypriot government would have to provide renewed financial support to the country’s banks because of their exposure to the Greek government and economy, and the commensurate impact of such measures on the government’s own financial strength.”