Cyprus’ housing market continues to recover
September 02, 2017
After eight long years of house price falls, Cyprus’ housing market is now stabilizing, amidst an improving economy. During the year to Q1 2017, the nationwide residential property price index increased slightly by 0.14% (-1.74% inflation-adjusted), after y-o-y declines of 0.94% in Q4 2016, 1.21% in Q3, 1.71% in Q2 and 1.6% in Q1, according to the Central Bank of Cyprus.
On a quarterly basis, residential property prices rose by 0.27% (0.12% inflation-adjusted) in Q1 2017.
- Nicosia, Cyprus’ capital, residential property prices were unchanged during the year to Q1 2017 (-1.9% when adjusted for inflation)
- In Limassol, prices increased 0.9% y-o-y to Q1 2017 (-1% inflation-adjusted)
- In Larnaca, prices declined by 0.9% y-o-y to Q1 2017 (-2.7% inflation-adjusted)
- In Paphos, prices dropped 1.3% y-o-y to Q1 2017 (-3.2% inflation-adjusted)
- In Farmagusta-Paralimni, residential property prices dropped 3.6% y-o-y to Q1 2017 (-5.4% inflation-adjusted)
By property type, apartment prices increased 1.6% during the year to end-Q1 2017 (-0.3% inflation-adjusted). On the other hand, nationwide houseprices dropped 0.3% (-2.1% inflation-adjusted) over the same period.
RESIDENTIAL PROPERTY PRICE INDICES(NOMINAL)
|2010-2016||Q1 2017||2010-2016||Q1 2017|
|Source: Central Bank of Cyprus|
Demand is now rising sharply. During the first seven months of 2017, property sales in Cyprus rose by 19.6% to 4,349 units from a year earlier. Sales to the domestic market rose 12.6% and sales to the overseas market were up by 41.3%, based on figures from the Department of Lands & Surveys.
Likewise, the number of dwelling permits soared 41% y-o-y to 1,889 units during the first five months of 2017, according to the Statistical Service of Cyprus.
This across-the-board housing market improvement is partly driven by Cyprus’ recovering economy. In 2016, the economy grew by 2.8%, an improvement from an annual growth of 1.7% in 2015 and y-o-y declines of 1.5% in 2014, 6% in 2013, and 3.2% in 2012, according to the International Monetary Fund (IMF). The economy is projected to expand by 2.5% this year, and by another 2.3% in 2017.
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 continued economic growth and improvements in the banking system.
“We expect property prices to broadly stabilise over the coming quarters, and the demand for property to increase gradually from low levels,” said Moody’s Investor Service.
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’ 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.
CBC statistics are collected separately from those of RICS, so the figures may differ slightly:
- In 2009, the residential property price index fell by 1.86% (-3.83% inflation-adjusted).
- In 2010, the residential property price index fell by 3.57% (-5.13% inflation-adjusted).
- In 2011, the residential property price index fell by 4.96% (-8.55% inflation-adjusted).
- In 2012, the residential property price index fell by 4.71% (-5.75% inflation-adjusted).
- In 2013, the price index fell by 8.5% (-6.34% inflation-adjusted) – the largest decline since the data started in Q1 2007.
- In 2014, the price index fell by 8.02% (-6.66% inflation-adjusted).
- In 2015, the price index fell by 1.8% (-0.84% inflation-adjusted).
- In 2016, the price index fell slightly by 0.94% (-0.69% inflation-adjusted).
Residential construction activity rising, but still far below peak levels
In 2016, there were 3,649 dwelling units authorized in Cyprus, up by more than 14% from a year earlier, according to the Cyprus Statistical Service.
During the first five months of 2017:
- The number of permits issued for the construction of residential buildings rose by abou 12% y-o-y to 1,643 units
- The area of residential building permits surged 39% to 414,915 square meters (sq. m.) from the same period last year
- The value of residential building permits increased 38% to EUR399 million over the same period
- The number of dwelling permits soared 41% y-o-y to 1,889 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 2015.
Property sales increasing, but still far below pre-crisis levels
In 2016, property sales in Cyprus rose by 42.6% to 7,063 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.
During the first seven months of 2017, property sales in Cyprus rose by 19.6% to 4,349 units from a year earlier. Over the same period, property sales to the domestic market increased 12.6% to 3,110 units, and sales to the overseas market were up by 41.3% to 1,238 units, based on figures from the Department of Lands & Surveys.
By major urban centres:
- Nicosia registered 708 sales contracts in the first seven months of 2017, up by 22.9% a year earlier.
- In Limassol, property sales rose by 33% y-o-y to 1,624 unitsover the same period.
- In Paphos, sales contracts increased 27.4% y-o-y to 1,083 units.
- In Larnaca, property sales fell by 10% y-o-y to 702 units.
- In Famagusta, sales contracts rose by 20% y-o-y to 252 units.
Interest rates continue to fall
Interest rates in Cyprus continue to fall, following European Central Bank (ECB) key rates. As of June 2017, the following average housing loan rates applied in Cyprus:
- Interest rate fixation (IRF) of up to 1 year: 2.97%, down from 3.76% in June 2016 and 4.45% in June 2015
- IRF over 1 and up to 5 years: 2.41%, down from 3.64% a year ago and 4.38% two years ago
- IRF over 5 years: 3.18%, down from 3.33% in June 2016 and 3.56% in June 2015
In July 2017, the ECB left its key rate unchanged at an all-time low of 0.00%, after cutting it by 5 basis points in March 2016 as a response to sharply lower oil prices and volatility in emerging economies and financial markets.
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, according to finance minister MakisKeravnos.
The market is becoming more sensitive to interest rate shocks. Variable-rate mortgages now account for about 98% of all housing loans in Cyprus.
Mortgage market declining
From 29.1% of GDP in 2005, the mortgage market grew sharply to about 76.7% of GDP in 2011, and was at 72.5% of GDP in 2016.
In June 2017, total outstanding housing loans were down by 1.8% y-o-y to €12.74 billion (US$15.2 billion), according to the Central Bank of Cyprus.
- Housing loans to domestic residents dropped slightly by 1% y-o-y in June 2017
- Housing loans to other euro area residents fell by 6.8% y-o-y in June 2017
- Housing loans to the rest of the world fell by 7.7% over the same period
Total advances to domestic residents consisted of more than 89% of total housing loans. The remaining 11% of loans were drawn by Euro area residents and those from the rest of the world.
Rents rising sharply, but yields steady
Average gross yields in Cyprus stood at 4% for apartments in Q1 2017, unchanged from a year earlier, according to RICS. Over the same period, gross yields for houses were 2.1%, slightly up from 2% a year ago. Nicosia recorded the highest gross yields for apartments at 4.3%, followed by Limassol (4.2%) and Famagusta (4.1%). For houses, Limassol had the highest gross yields at 2.5%.
Across Cyprus, monthly rents rose by 5.5% for flats and by 9.6% for houses during the year to Q1 2017, based on figures from RICS. Residential rents are now at their highest levelfor four years.
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 March 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.
Despite this, the land registry has recently vowed to continue issuing title deeds to trapped buyers.
“We decided to continue issuing title deeds for the remaining 11,500 trapped buyers despite the court rulings, we will appeal the court rulings and we will introduce legislative amendments to correct the problem,” said Interior Minister ConstantinosPetrides.
Banking system improving
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 three 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.
Banking system solvency is also improving. NPLs were 133.2% of GDP in 2016, down from 155.6% of GDP in 2014. 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 will also improve Cypriot banks' asset quality.
As a result in July 2017, Moody’s Investor Service upgraded Cyprus’ long-term issuer rating from B1 to Ba3 and maintained its positive outlook.
Economic growth strengthens, but deflation persists
The economy grew by 2.8% in 2016, driven mainly by strong domestic demand. Then in the second quarter of 2017, the economy expanded by 0.9% from the previous quarter and by 3.5% from a year earlier.
Economic growth is expected to be 2.5% this year and 2.3% next year, according to the European Commission.
Cyprus’ economy contracted about 2% in 2009, mainly due to the adverse impact of the global crisis. After registering anaemic growth rates of 1.4% in 2010 and 0.4% in 2011, the economy shrank again by 2.4% in 2012. The economy remained depressed in the following years, with a huge 5.9% contraction in 2013, and a 2.5% contraction in 2014, based on IMF figures. The economy recovered in 2015 with GDP growth of 1.7%.
Cyprus recorded a public budget surplus of 0.4% of GDP in 2016, a sharp improvement from deficits of 1.2% of GDP in 2015 and 8.9% of GDP in 2014, according to the European Commission.
Despite this, public debt remains high at 107.8% of GDP in 2016, slightly up from 107.5% in the previous year. Public debt is expected to decline to 103.4% of GDP this year and to 99.8% of GDP in 2018.
Consumer prices dropped 0.7% in July 2017 from a year earlier, according to the Statistical Service of Cyprus.
Unemployment fell to 10.8% in June 2017, from 11% in May 2017 and 12.9% in the same period last year, according to Eurostat. From an average of just 4.8% from 2000 to 2011, unemployment surged to an average of 14.4% from 2012 to 2016, according to the IMF.