Cyprus Property Market – A Survival Guide

 

The Cyprus Informer says “it is not a great time to buy off plan right now with the build in of big commissions and VAT which have to unwind. That might not unwind by appreciation over the next 2 years or so as the Cyprus market currently comes off boom if you wanted to sell quite quickly. But looking for the right Re-Sale where the seller realises that current off plan prices include commission/VAT and he/she must discount the asking price below current off plan prices to get a sale. A good property in that situation has some margin in more difficult times. And make sure that you get your Title Deeds with your Resale.  No chance on Off Plan !!.

Whilst the Golden Boom in Cyprus Property is over, there is still a healthy property market in Cyprus and every prospect of that continuing for years to come. And why does The Cyprus Informer say that?   And what is your survival guide? Here is a quote from the Royal Institution of Chartered Surveyors. “Only Cyprus and Iceland saw house prices outstrip the previous year’s performance, according to the Royal Institution of Chartered Surveyors report, which called the end of the property goldrush.”“The finger of blame has been pointed at the worldwide credit crunch in existence from summer onwards.”

“However, the most important factor was probably the more prosaic one of rising interest rates. Interest rate responses by monetary authorities and capital markets responses to concerns about escalating general price inflation brought the housing boom to an end.”

Whilst the Cyprus Property Market Survival Guide makes eminently just good common sense there is a good understanding of economics right behind it.

Escalating general price inflation has been adversely affected by big increases in energy costs, notably oil and gas, which caused the monetary authorities to raise interest rates to choke off inflation [and control property price appreciation in the UK]. Another factor involved in the hike in energy prices has been the cost of the energy industry responding to climate change and of course the move in agriculture to profitable but very green bio diesel. That coupled with adverse weather conditions has caused grain to increase in price which adds to general price inflation. In addition the consumer led boom driven by low interest rates also had a big part to play in escalating general price inflation. But choking this off as well with interest rates just stopped economies in their tracks.

The big mistake in the UK was to have a monetary authority legally responsible for controlling inflation when the worst possible action at the time was to raise interest rates at a time when special political circumstances had affected energy costs. But a Labour Government had decided that interest rates and inflation would be placed outside of political control.

The worldwide credit crunch has damaged many economies and particularly the US. The credit crunch caused the money market dysfunction in the UK which brought down The Northern Wreck.

A combination of the effects of the credit crunch and,ironically, falling interest rates have caused those damaged economies to suffer exchange rate depreciation as the markets have lost confidence in those economies.

So the root cause of the property crisis was not exchange rate depreciation but interest rate policy deployed to reduce inflation [which was in some senses inherent in the consumer led demand economies].

The banks have pushed the world to go on a huge consumer binge, including in the property markets, when governments simply ignored that it was bound to end in tears. As it has now. But the Cyprus Central Bank took prudential action in September 2007 by requiring deposits on property loans of 40%. 

But as the bust recedes then economies such as the US and the UK will recover slowly and as confidence returns so will more orderly exchange rates. Intuitively we know that Euroland is not as strong as it appears and adjustment will take place……….but not for a while yet and may be worse to come first.

Cyprus is still in its consumer led boom and the GDP figures are strong.  Don’t expect any bad news in the next 3 years or so. 

The recent Cyprus Central Bank action reminded me of the Competition and Credit Control Order of 1975 when banks in the UK could not give you a loan to purchase cars,furniture etc without the customer putting up one third of the purchase price……..and the bank had to see your contribution in your bank account !!

What followed were voluntary prudent lending policies; if you bought a property then you had to have saved the costs and at least 10% with a building society over several years.

Yes, the Cyprus Central Bank has adopted a prudent property lending policy for non resident borrowers. More relaxed for residents of Cyprus and not just reserved for Cypriot Nationals.

But the Cyprus property market is contracting slightly because of  Investors from UK Limited and the introduction of Cyprus credit controls . Not surprising when the latest symptoms are UK interest rates at base rate 5.25% (still higher in the money markets) and 1.28 Euro/GBP. Borrowing in the UK against an asset reducing in value where banks are not wishing to lend is difficult. But Euro loan rates in Cyprus are lower. But you have to find your deposit. Be wary of deals that offer 100% funding from fringe offshore banks.

What else is affecting investment in Cyprus property?  Investors from Euroland perceive political risk. And just for one reason. The new President is a communist.  Euroland has more experience of Communists than in the UK. “In history they say, each time a communist party was at the lead, all the foreign investment dropped brutally”.

But take note of what property expert Antonis Loizou says about the political risk in the Cyprus property market;

Antonis Loizou says “Yes, regarding foreign people it would have been better for this party to be named a “labour party” and Lenin’s head statue to be removed from the Secretary General’s office.”

“So what we expect will happen, is that a slightly higher social security contribution by employers, the raising of the free income tax, the reduction of tax free allowances, the increase of pensions amount, the greater resistance on privatization of business and services and bearing in mind the good organization and discipline of this party, the possible better economy of Government.”

“On the political Cyprus Issue [Cyprus Problem], we will expect a progress towards the solving of the Cyprus problem and a better bilateral climate. This Cyprus Communist party and our new President has declared that the existing mix economy is not a model that he will change but he will attempt to have a more “fair” social economy.”   

The UK property market will most likely, as most commentators suggest, suffer in its “bust” from stagnation/small depreciation. That is because there is a general under supply in terms housing capacity which is supported by local demand.

Cyprus will always tend towards an oversupply in my opinion because local demand is low, but the over supply will be nothing like as some have suggested. That will tend Cyprus towards depreciation rather than crash. Expect 20/30% reductions in the general market if there is not a full recovery from foreign investors.

So I suggest that it is not a great time to buy off plan right now with the build in of big commissions and VAT which have to unwind. That might not unwind by appreciation over the next 2 years or so as the Cyprus market currently comes off boom if you wanted to sell quite quickly.

But looking for the right Re-Sale where the seller realises that current off plan prices include commission/VAT and he/she must discount the asking price below current off plan prices to get a sale. A good property in that situation has some margin in more difficult times.
 

Cyprus Property Help & Advice Centre™ ® ©
The Black Art of Buying Property in Cyprus™ ®
The Cyprus Informer™ ® ©
http://cyprusinformer.eu

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