The main factor is the increased construction costs
Rising interest rates negatively impact demand for loans
Construction costs and increased demand from foreign and local buyers contributed to the acceleration in increases in house prices in the third quarter of 2022.
According to data from the Central Bank of Cyprus (CBC), the CBC House Price Index (CPI) (houses and apartments) continued its upward trend in the third quarter of 2022, increasing by 2.1% compared to an increase of 1.7 % in the previous quarter, while on an annual basis the index recorded an increase of 6.3% compared to an increase of 4.7% in the previous quarter. The main factor for the acceleration in house price increases continues to be the increased construction costs, while at the same time the increase in demand in the real estate market seems to be contributing in the same direction.
Transactions in the real estate market in the first nine months of 2022, as recorded in the sales document data of the Department of Cadastre and Surveying, show accelerated growth, which is attributed to annual increases in demand from both domestic and foreign investors.
Inflationary pressures, which have a significant impact on construction costs, continue this quarter, but so far do not appear to be materially affecting demand.
The increase in borrowing costs due to the ECB's key rate hike appears to have weighed on mortgage demand in the third quarter of 2022, potentially weighing on future construction activity.
Resilience in property market despite uncertainty
The CPI (houses and apartments) in the third quarter of 2022 registered a quarterly increase of 2.1% compared to 1.7% the previous quarter.
The rise in the CPI comes from a 2.2% increase in apartment prices compared to the previous quarter and a 2.0% increase in house prices over the same period.
In year-on-year, house price growth also accelerated by 6.3% in the third quarter of 2022, compared to 4.7% in the second quarter of 2022. Apartment prices during the quarter under review recorded an annual increase of 8% and house prices by 5.2%.
As noted, it appears that the real estate market, despite continued high uncertainty due to geopolitical developments, is showing resilience, with the acceleration in house prices continuing this quarter.
This increase is mainly due, as in the previous quarters, to the increasing construction costs and is reflected both in the prices of apartments and houses. Also contributing positively to price increases is the increase in demand from both foreign and domestic investors, which is evident from the figures of the Greek Treasury.
The small rise in lending rates which occurred in the third quarter of 2022, has so far not affected deposit rates, keeping the property market an attractive option, since property yields a higher return than buy-to-let deposits.
The most important impetus to the demand for real estate purchases by foreign investors seems to have been exerted by the descent of foreign professionals in the context of international headquarters. The companies that were attracted as part of the international headquarters are mainly active in the financial services, shipping, technology, information and communication sectors and are mainly concentrated in Limassol and Paphos, while increased mobility has recently been observed in Larnaca as well. According to data from the Ministry of Energy, Trade and Industry, more than a thousand companies of foreign interests have registered in Cyprus as part of the International Headquarters in 2022.
Increased prices in all provinces
During the third quarter of 2022 house prices on a quarterly basis increased in all provinces. Specifically, an increase of 1.2% was recorded in Nicosia, 3.0% in Limassol, 1.2% in Larnaca, 2.6% in Paphos and 2.3% in Famagusta.
In terms of annual changes in house price indices by province, an increase was recorded in all provinces. Specifically, in Nicosia house prices increased by 4.4%, in Limassol by 8%, in Larnaca by 2.8%, in Paphos by 8.2% and in Famagusta by 8%.
On an annual basis, the prices of both apartments and houses registered an acceleration in their rate of growth in all provinces with the exception of houses in the province of Larnaca.
On a quarterly basis, house prices recorded increases in all provinces.
Specifically, in Nicosia they increased by 1.3%, in Limassol by 2.8%, in Larnaca by 0.6%, in Paphos by 2.6% and in Famagusta by 2.3%. On an annual basis, house prices also recorded growth in all provinces. Specifically, house prices in Nicosia, Limassol, Larnaca, Paphos and Famagusta increased by 4.1%, 6.7%, 1.1%, 7.4% and 6.5%, respectively.
The prices of apartments on a quarterly basis recorded an increase in all provinces.
Specifically, in Nicosia they increased by 1.1%, in Limassol 3.2%, Larnaca 2.6%, Paphos 3.3% and Famagusta 2.6%. On a year-over-year basis, apartment prices also increased in all provinces. Specifically, in Nicosia prices increased by 4.9%, in Limassol by 9%, in Larnaca by 7.2%, in Paphos by 11.9% and in Famagusta by 12.9%.
Significant increase in sales documents
According to the latest data from the Department of Land and Surveying (TCX), the number of sales documents continued to register growth in the third quarter of 2022 by 33.8% year-on-year (3,347 compared to 2,502), reflecting increased demand for real estate.
Additionally, during the quarter under review there was a 67.3% year-on-year increase in the number of properties traded to foreign buyers (1,506 compared to 900), driven by a 32% increase in purchases by residents within the European Union (EU) and 104, 1% increase in purchases from non-EU residents.
Overall, in the first nine months of the year the number of sales documents increased by 37.2% compared to 28.6 % the last year. The increase from local buyers amounted to 17.4% while from foreign investors there was a remarkable increase of 76.7%.
According to market information the demand from local investors is found in older properties, which are ready to be delivered or even in second-hand ones which may be bought at a lower price and renovated.
Along with the increase due to International Headquarters, the war in Ukraine continues to create demand in the real estate market from entrepreneurs and investors from Russia and Ukraine.
The increase in interest rates negatively affects the demand for loans
At the same time, inflationary pressures and by extension the rise in the basic interest rate hikes by the ECB appear to have negatively affected demand for new home loans.
According to the publication of Monetary and Financial Statistics of the CBC, new loans for the purchase of housing in the third quarter of 2022 decreased by 12.3% and 6.7% on an annual and quarterly basis, respectively (€238.8 million in the third quarter of 2022 compared to €273.0 million in the third quarter of 2021 and €256.1 million in the second quarter of 2022).
Also, according to the same statistics, the home loan rate in the third quarter of 2022 continued to register increases, having averaged 2.72%, compared to 2.27% in the second quarter of 2022.
Further increases in mortgage rates are expected in the future given the rate hike by the ECB. According to the Banking Survey, the financing criteria became stricter compared to the previous quarter.
According to data from the Cyprus Statistical Service, the number of residential units for which they were approved building permits, which is a precursor to construction activity, registered an annual decrease for the period January – September 2022 by 7.3%.