Economists at the European Central Bank (ECB) have stated that monetary policy decisions directly impact household spending, investment, and consumption. One key channel of influence is the real estate market, where mortgage loans determine demand dynamics. Rising or falling interest rates affect not only the number of housing transactions but also overall consumption, including spending on furniture, appliances, and services.
How is housing affordability changing?
Between 2022 and 2023, the ECB sharply raised key interest rates to curb inflation. This made mortgages less affordable, as monthly payments for new borrowers increased more quickly than household incomes. The housing affordability index, which considers the ratio of prices, incomes, and mortgage payments, reached its lowest point in recent years.
Since mid-2023, rates have started to decrease slightly, helping the market recover somewhat. However, affordability remains lower than in 2021, when mortgage rates were at record lows.
How do rates affect spending and mortgages?
ECB research shows that an increase of 0.25 percentage points in interest rates reduces house sales by an average of 2% over three years. At the same time, consumption of household goods falls by 0.3%. These findings confirm that the "mortgage channel" is the most significant mechanism through which monetary policy influences the broader economy.
Between 2022 and 2023, rising mortgage costs led to fewer residential property purchases and reduced household consumption. Household spending on goods is estimated to have fallen by around 10%, while private consumption as a whole fell by 0.6%.
The situation in Cyprus involves rising interest rates and housing prices
The housing affordability problem is particularly acute in the Cypriot market. According to the Central Bank of Cyprus, the average mortgage rate rose from 3.74% in May 2025 to 3.97% in June. For fixed-rate loans of up to one year, the rate reached 3.95%, higher than the eurozone average of 3.61%. Incidentally, Cyprus is among the top five countries with the most expensive mortgage loans.
Meanwhile, fixed-rate real estate loans with terms of one to five years were slightly cheaper, at 3.09% in June compared to 3.16% in May. This figure is also below the eurozone average of 3.41%, which partly supports demand.
Meanwhile, housing prices on the island continue to rise. According to the Cyprus Statistical Service, the Residential Property Price Index increased 2% year-over-year in the first quarter of 2025. The Central Bank reported a growth rate of 4.8%. Housing prices are rising particularly rapidly (+5.6%), while apartment prices increased by 3.5%.
The affordability of housing for Cypriot families
Despite moderate income growth, the combination of high prices and rising mortgage rates is making homeownership increasingly unaffordable for young families. Cyprus fell to 42nd place in Knight Frank's global index of house price growth rates. Over the past year, prices increased by only 2% in nominal terms and 0.4% in real terms. This represents a significant slowdown compared to 2023, when the market grew by 8.5%.
Forecasts for 2025
Experts expect mortgage availability to gradually improve in the coming months, thanks to stabilizing rates and rising incomes. However, uncertainty remains, as geopolitical risks, trade disputes, and the global economic slowdown could affect the market. In Cyprus, where demand for housing is traditionally supported by foreign buyers and investment in resort regions, the situation remains mixed. Mortgages for locals are becoming more expensive while the housing market continues to show steady price growth.