05.03.2023
Thousands of borrowers have been hit by higher interest rates as their monthly mortgage payment has increased by hundreds of euros, causing housing market anxiety.
With signs that the European Central Bank will continue to raise interest rates to fight inflation, fears of a downturn in the property market have intensified.
The ECB has raised interest rates by three percentage points since July and has already hinted at an additional 50 bps (half a percentage point) hike ahead of the March 16 board meeting, with markets now looking for a further 75 bps hike before the end of the summer.
In real terms, monthly mortgage payments increased by several hundred euros. The average mortgage interest rate in July was 2.5%, and the maximum could reach 3%. So, in the summer, if someone took out a loan of 200,000 euros with a maturity of 20 years, his contribution would be 1,060 euros. However, since the ECB has raised rates, mortgage rates are now between 5.5% and 5.75%.
Since the majority of home loans are issued with a flexible market-adjusted interest rate, the monthly loan payment of 200,000 euros has increased by 345 euros.
When an additional increase is expected in mid-March, the general interest rate will be between 6% and 6.3%, i.e. an increase of more than 400 euros, bringing the monthly payment closer to 1470. This puts additional pressure on households experiencing difficulties due to for high inflation rates, while aspiring young couples will think twice before taking out a mortgage loan.
Eleni Averkiou , a real estate consultant for Danos /BNPRE Group , said interest rate hikes happen when the market picks up momentum, forming a positive trend. According to her, real estate agents have already recorded a drop in demand in the housing market due to rising inflation and interest rates.
“After the lifting of the strict measures against COVID, we are seeing an increase in the market, mainly due to local interests and foreign firms and their employees moving to Cyprus in search of housing and office space,” Averkiou said . Danos believes the market is still growing thanks to locals and foreigners. “This source of buyers will soon dry up, leaving the industry looking for buyers as we see new local buyers hesitating to take out a loan agreement with a bank. We are also seeing interest in smaller apartments and houses, which helps the sector stay resilient during this challenging period,” Averkiu said .
Danos consultant noted that banks try to be helpful by processing loans as quickly as possible, and in the case of reliable borrowers, a better interest rate can be offered. She argued that the authorities should intervene to take steps to help unlock the sector.
Negative Effects
Averkiou said authorities must find ways to balance the negative impact of interest rates on households. “Interest rates and the cost of living have risen, and salaries have not changed for years. The government and the new finance minister should look into this and find ways to support new homebuyers.” She suggested that the government consider a one-time grant to help families buy their first home.
Although the development of the real estate sector is a concern, economists do not believe that this could lead to a new wave of problem loans.
Ioannis Tirkides , chief economist at the Bank of Cyprus, claims the financial data is different from what it was in 2013 when the banking crisis hit. He said housing affordability depends on changes in income, home prices and interest rates, which determine the cost of servicing debt.
“As interest rates are higher and real incomes are falling due to inflation, the affordability of real estate is falling. As a result, the demand for borrowing will suffer. But that doesn’t mean NPLs will start rising to any alarming degree in both the household and the business sector,” Tirkides said .
He argues that several factors make the current credit situation much more manageable than in previous years. He added that the level of income in the economy today is 40% higher than ten years ago, and residents’ loans are less than half in absolute terms and less than a third in relation to GDP. “Resident loans to GDP were 80% at the end of December 2022 compared to 270% at the end of December 2012.”
The economist said that despite the slowdown in the economy, employment is expected to remain relatively high, starting with a position of labor shortages in many areas supporting solvency.
“We can expect some increase in nonperforming loans, but I do not expect this to become a major problem in an economic downturn, as we expect, even in a modest recession, which is not expected.”
