15.01.2024
Owning a home is fast becoming a nightmare for investors in Cyprus, especially young couples dreaming of their first home, as interest rates on home loans topped the 5% mark, setting a ten-year record, according to the Central Bank of Cyprus.
Despite the fact that the European Central Bank has fixed the household purchase loan rate at 4.05% from September 2023, Cypriot banks continue to increase interest rates, placing additional burden on households.
Central Bank data shows that the average interest rate on new home loans in Cyprus has reached 5.04%, up from 2.15% in January 2022. This essentially represents an increase of 134.4%, or 289 basis points, over two years, resulting in a financial loss of two and a half average salaries for households seeking to purchase their dream home through Cypriot banks.
Considering that 56% of workers have a gross income below €1,750 per month, the real impact of this increase becomes clear. For a loan of €150,000, the increase in interest rates results in an additional monthly cost of €361.25 or €4,335 per year, which corresponds to two and a half monthly salaries for most employees.
Existing borrowers with variable rate loans also face significant challenges. For a loan of €150,000 with a maturity of more than five years, the interest rate rose to 4.36%, up from 2.04% in January 2022, an increase of 113.7% or 232 basis points. This results in additional costs of 290 euros per month or 3,480 euros per year. At the same time, interest rates on loans with a repayment period of 1 to 5 years increased by 142.2%, and for loans with a repayment period of less than one year, the increase in interest rates is 102.6%.
High borrowing costs may be behind the steady decline in household lending in Cyprus, from €12.11 billion in the third quarter of 2022 to €11.13 billion in the third quarter of 2023, according to Sapienta data Economics .
Meanwhile, property prices in Cyprus, having experienced significant growth in recent years, are returning to pre-2013 levels.
Central Bank data shows the house price index for the third quarter of 2023 is 91.4 points, approaching the 2012 level (91.2 points), after falling to 89.4 points in the second quarter of 2023.
The house price index has recovered much of the losses incurred during the financial and banking crisis and is now 24.5% above its 2006 low.
The economic crisis after 2013 led to a decline in property prices: the house price index fell to 77.8 points in 2014 and continued to decline to 74.4 and 73.4 respectively in 2013 and 2014.
The stabilization of the supply of new residential real estate, improved incomes and increased demand for it from foreigners stimulated a significant increase in prices, contributing to the revival of construction activity. However, the sharp rise in prices for new properties is largely due to the revaluation of construction raw materials, which leads to increased construction costs combined with increased demand from both domestic and foreign buyers.
