17.10.2022
The banking and real estate sectors of Cyprus will not be affected by a possible bubble due to the overheating of the housing market in the European Union, local stakeholders say.
According to a recent study by the European Banking Authority, real estate in most EU countries posted double-digit growth between Q1 2021 and Q1 2022, with the fastest growth being seen in the Czech Republic (25%), Estonia (21%) and Lithuania ( 21%), while 15 other countries reported growth of at least 10% in 2021.
The EBA has published a feature note on the risks of EU banks in relation to residential real estate: risks and mitigation measures. As noted in the report, EU banks reported more than 4.1 trillion euros of loans and advances secured by residential real estate. This corresponds to 1/3 of all loans issued to households and non-financial corporations.
Demand for housing has been robust in recent years, the EBA notes, adding that EU banks’ strong capital and liquidity positions have enabled them to meet this demand by expanding their exposure to mortgages.
“At the same time, housing supply has been unable to meet demand due to a lack of housing investment in previous years, construction restrictions and supply chain disruptions caused by the pandemic. As a result, house prices recorded high growth rates in many EU countries, which raised concerns about overheating markets,” the EBA said in a statement.
He warned that the macroeconomic environment has deteriorated sharply and the likelihood of a recession has increased.
“High inflationary pressures and the consequent rise in interest rates have pushed up the cost of living without a corresponding increase in income. This is a difficult task, especially for households with low incomes and high debts.”
The EBA is mainly concerned that a sharp fall in house prices, combined with a rise in defaults, could create problems for EU banks. Almost a third of EU bank loans are mortgage loans.
In recent years, banks have significantly increased their presence in this area. While there are some early signs of deterioration in asset quality in mortgage portfolios, such risks have yet to materialize. However, in Cyprus, local stakeholders feel comfortable in the real estate sector, and the banking sector will not feel the heat from the bursting bubble in the EU.
Late Recovery in the Real Estate Sector
The CEO of Ask WiRE, said the Cypriot real estate sector did not follow the same recovery path as the rest of the bloc after the 2008 crisis, saving it from overheating.
“You could even say that the island’s real estate market didn’t even have a chance to warm up, as the recovery started much later than in the rest of the Union,” Loizu said. He explained that while property markets in the euro area started to recover around 2011, the banking crisis in Cyprus in 2013 pushed back the recovery by several years.
“It was only in 2016 that the real estate sector in Cyprus began to recover.” This late recovery, he explained, also meant that the island’s banks began issuing home loans again much later than the rest of the bloc, saving them from excessive risk.
“Another element is that Cypriot developers no longer get involved in speculative projects, building many residential buildings that they hope to sell to expats or foreign investors. The market is mainly focused on existing local demand.”
George Muskides, chairman of the Cyprus Property Owners Association, agreed that the market is far from overheated like the rest of Europe.
“Of course real estate prices have risen, but this is mainly due to an increase in construction costs , and not an increase in demand,” Muskides said. According to him, the demand is at a normal level, with between 10,000 and 12,000 transactions registered per year in recent years.
“We are barely close to the demand recorded in 2009, just before the housing crisis hit the island. Rising house prices are cost-driven and will not collapse if there is a sharp drop in demand. I would even go so far as to say that without the increase in construction costs, house prices in Cyprus could have dropped significantly over the last couple of years. I don’t see prices falling in Cyprus in the next couple of years.”
Ioannis Tirkides, chief economist at the Bank of Cyprus, said the growth recorded in this sector has corrected the market, not overheated it. “Recent growth has corrected the market after a sharp drop during the crisis in 2013,” Tirkides said.
Asked if an increase in mortgage interest rates could distort the market, Tirkides said that while mortgage interest rates could reach 5% from 2.5% by the end of next year, it would not affect the initial capital needed to buy a home. but the cost to the buyer.
“It will not push prices up, creating a possible bubble. It will definitely make it harder for people to get new loans and pay off existing ones, but any impact will be manageable.” Tirkides also acknowledged that geopolitical uncertainty and the energy crisis are taking a toll on consumer and business confidence.
While employment remains strong, these developments could impact demand for home and property purchases. He replied that, like all previous crises, this could lead to difficulties for consumers, “but the situation will definitely not come close to the 2013 crisis.”
