What is an economic bubble in the real estate market and who inflates it?
First, let's deal with definitions and concepts.
A housing bubble is a type of economic bubble that occurs in the real estate market and usually follows a land boom.
A land boom is a rapid rise in market prices for real estate, in particular for housing, until they reach an unsustainable level, and then fall.
The bubble inflates the excessive demand for any asset, as a result of which its price rises rapidly, and completely unreasonably. This is how the “bubble inflates” occurs, and a little later there comes the moment of “bursting”, when the price begins to decline extremely quickly and in a panic. This happens after participants realize that the previous overpricing was clearly inadequate.
Housing bubbles tend to have a stronger impact on the economy than stock market bubbles.
Historically, stock price declines occur on average every 13 years, last for 2.5 years, and result in a loss in GDP of about 4 percent. House price spikes are less frequent, but last almost twice as long and result in twice as much production loss. Prices are falling more slowly because the real estate market is less liquid.
Although different schools of economics define the drivers of a market overheating in different ways, there are generally four signs of a real estate bubble:
- financial availability. It is measured by the value of real estate to the value of GDP. It can be determined for a separate territory taken as a cost to the income of the population.
- The amount of mortgage payments. It is measured by the share of mortgage payments to the income of the population.
- Rental rate. It is defined as the rental rate to the cost of the house.
- Profitability of construction. Defined as profit to costs.
Since the beginning of the 2000s, adjusted for crises and largely due to the measures taken to overcome them, Cyprus has experienced a real estate boom. Skyscrapers and elite objects appeared almost everywhere.
However, the luxury real estate sector, which saw the largest growth with the advent of the Citizenship by Investment program, lives by its own laws. All projects are atypical, the locations are special, each has its own unique pool of advantages, which, on the one hand, prevents an adequate assessment of the property, and on the other hand, gives the seller opportunities for cheating.
It looks like we've created another bubble in the real estate sector. The property market in Cyprus is growing at a pace that is generally inconsistent with major economic indicators such as GDP, demand and demographics. Rapidly rising property prices and rising construction volumes are dangerous and not a good sign for the economy, which could cause damage in the future. At the same time, there was the program of the Golden Passports, which at that time was criticized by everybody. I often run into people who tell me they live in London even though they have a Cypriot passport. When I ask them about how they got their passport, they answer that they bought a house in Limassol. All this reminds me of a sham marriage scheme,” Christoforos Pissaridis, the only Cypriot Nobel laureate in economics, now living in London, wrote in 2019.
According to the Cyprus office of the Royal Institution Of Chartered Surveyors (RICS), in the first half of 2018, prices for apartments in Cyprus increased by 7.6% compared to the same period in 2017, for houses - by 4.8%, for offices - by 11 .6%, for warehouses - by 4.2%, and for retail premises - by 1.7%, while the GDP of Cyprus in 2018 grew by 4%.
However, by the end of 2019, the situation began to change radically. Initially, in accordance with the words of Pissarides, the pressure of the European and world regulatory organizations on the investment program increased, as a result of which decisions were made to tighten the requirements for candidates.
It only got worse from there. At the end of the year, it became known that a case of human infection with an unknown form of coronavirus was recorded in Wuhan, China, and a year later, the Cyprus investment program was closed, after which it ultimately died. Since November 1, 2020, the Citizenship by Investment program has been suspended.
Two years of the coronacrisis
The players in the real estate sector in Cyprus, over the course of two years, were mainly influenced by two factors: the pandemic and the cancellation of the passport program. In this scenario, the supposed bubble should have burst, but this did not happen. The market survived a serious crisis, “lay under a ventilator”, but suffered adversity. The pandemic and a long series of lockdowns have not led to a disaster in the real estate sector.
Recall that at the end of 2019, real estate sales were a record for the last 10 years. Moreover, both the demand from foreign investors who wanted to jump into the last car of the outgoing train of the Cyprus investment program, and domestic demand grew.
The Department of Land Resources and Research of the Republic of Cyprus registered 10,366 transactions: 4,482 objects were purchased by Cypriots, 5,884 by foreigners.
With the advent of the coronavirus, sales have dipped as expected. In 2020, the number of transactions decreased to 7,968 (4,983 on the local market, 2,985 on the external market). However, in the first pandemic year, the number of transactions was higher than in the calm 2016, when the Department of Land and Research recorded 7,063 transactions.
Several factors played a role here. Firstly, not all developers were guided by "passport holders". Secondly, some companies have managed to adapt to new conditions and restructure their work by reducing requests. Thirdly, the timely measures taken to support domestic demand worked. Fourthly, despite the fact that the program of "golden" passports is no longer relevant, another state program continues to operate in the Republic of Cyprus, according to which foreign investors who have bought property worth over 300 thousand euros can obtain a permanent residence permit in Cyprus, and after a few years - citizenship. In March 2021, the terms of this program were simplified, and there were more investment options.
That is, the Cypriot real estate market has once again shown flexibility and high adaptation to new conditions in recent history.
The construction industry in 2021 showed a fairly rapid recovery: in the first four months of 2021 alone, the number of building permits increased by about 45%, and the number of commissioned objects increased by almost 50%.
Undoubtedly, the real estate market has changed.
At the same time, changes in the sphere of Cypriot real estate are taking place, but they are not as dynamic as they were in previous years of crisis.
The market from 300 thousand to a million is very active, there are many interesting projects. As for the objects “two million plus” - elite real estate, which was previously purchased under the passport program, there is a demand for them, but people make decisions more difficult. The passport option is still missing. The most active are those who already live in Cyprus and have citizenship. And this is understandable, because when a person has spent two million, he becomes attached to the place and wants to continue investing.
Government subsidies for the purchase of economy-class housing have worked well. In the first half of 2021, 68% of transactions were made by the locals.
By the way, foreigners with permanent residence in Cyprus can also take advantage of state support.
According to the Cyprus Property Price Index, presented by KPMG, currently the main trigger for the growth of property prices in Cyprus is increased demand for apartments and commercial properties in coastal areas.
Commenting on the results, Christoforos Anagiotos, Head of Real Estate at KPMG, noted an increase in the supply of apartments (in most areas), retail (Paphos), warehouse (Larnaca) and office properties in Limassol and Paphos. At the same time, resort real estate designed for tourists is experiencing a slight decline.
Overall, the momentum given at the end of last year is building up to a positive outlook for the real estate sector, and the trend is likely to continue into 2022.
Improving the situation in the real estate sector is also recorded by the Central Bank of Cyprus and statistical services. Thus, the Central Bank noted that the purchase of apartments mainly supports the ongoing increase in real estate prices, recorded in the third quarter of 2021.
So what about the bubble?
Based on the above data, it is easy to see that the predictions that the tightening of the conditions of the Cyprus investment program will lead to a burst of the bubble did not come true. Even with the complete curtailment of sales of "golden" passports, the real estate sector of Cyprus survived. The bubble did not burst, the excitement in the elite sector cooled down somewhat, but the demand remained.
Theoretically, two factors can negatively affect the real estate market (unless, of course, new threats arise). This is the continuing rise in prices for building materials and energy, as well as too cheap mortgages.
Mortgage rates are low and quite a few borrowers really cannot afford a mortgage, but still try to get it on favorable terms while they can. The number of risky borrowers is on the rise, fueled by the pandemic. If the program ends, then the bubble may indeed collapse, but the likelihood of such a scenario is low, since financial institutions and authorities will try to avoid this.
Have you decided to buy an apartment or a house in Cyprus? Contact DOM! The website has a large selection of real estate - residential and commercial. Experienced agency specialists will be happy to help you make the right choice.
- Buying property in Cyprus with cryptocurrency
- Living Room Storage: 7 Inspirational Ideas for Cyprus Property Owners
- Elite Island Properties: Continuing the Middle East Tradition in Cyprus
- Permanent residence permit in Cyprus
- Closer To Stars: What Do Most Luxurious Penthouses In Cyprus Look Like?
- Land Registry In Cyprus