Cyprus Central Bank defends property margin action

The Governor of the Cyprus Central Bank Athanasios Orphanides has defended the Central Bank’s decision to increase the margin requirement on loans for property purchases in Cyprus, which aims to improve the risk profile of the bank loan portfolios as well as curtail the rapid growth in property loans and prices.

During the last two years, property prices have been rising at a very high rate, but Orphanides did not wish to discuss or express his views on whether property prices in Cyprus were over-priced.

“Our aim is not to tamper with property prices, which although sharply up during the last couple of years may continue higher, but to ensure that price swings are measurable,” said Orphanides.

The sound and healthy growth of the economy, EU membership, high influx of foreigners seeking to purchase property in Cyprus as well as smooth integration into the euro-zone, which lowers the country risk of Cyprus have all helped to push prices higher, but economists widely agree that the biggest reason why prices are shooting up is because of the ease with which banks have been lending money aimed at property sector.

Orphanides said that bank lending in August 2007 had surged by 25% year-on-year compared to August 2006, the highest pace of increase seen during the last 20 years. In an effort to curtail the sharp jump in bank lending, the Central Bank imposed a higher margin requirement in July for banks to make property loans whereby banks can only lend up to 70% of the property compared to 60% previously. First time home buyers are exempt from the rule and can borrow up to 80% to purchase a home, but banks have been advised to cut margin allowances to foreigners.

Orphanides said it was too early to tell if the margin increase measure had the desired effect and he dismissed suggestions that the measure against foreigners was too harsh. “We want the contribution of foreigners purchasing property here to be positive from all aspects.”