Property values: Impossible to forecast medium-term trends

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GEORGE MOUSKIDES

The economic crisis in Cyprus has significantly affected property values downwards over the last three years. What can we expect for prices from here? If someone wants to buy a home or acquire a property for investment when should he proceed?
This is very difficult to answer right now as the factors affecting prices are many. These depend on:
– The psychology of buyers and sellers;
– Demand and supply;
– Supply of financing and interest rates;
– Factors for specific properties such as: Construction Costs, Quality of Property, Area, Type of Property.
The psychology of buyers has reached the lowest levels we can remember since the invasion of 1974. Uncertainty is a major factor that depresses buyers’ psychology and as you can feel we have plenty of that. The uncertain economic situation in Greece, the political situation in Cyprus and our government’s weak finances are some of the factors causing uncertainty. A positive spin to the psychology of buyers may emanate from the potential exploration of natural gas and the political risks and financial opportunities that may go with it.
An important factor for prices is the volume of supply and demand for properties. Concerning supply, we can highlight a major weakness for Cyprus in the absence of timely and accurate information as to the number of properties available for sale. Empirically, we appreciate that certain types of properties in certain areas are in higher supply than there is demand, hence depressing prices further.
It is a fact that higher building densities have been recently granted on the periodic reviews of the various building zones that takes place every five years or so. Higher densities in the city centres were mainly awarded for commercial zones. It seems that the additional building density factor is hardly a benefit for existing buildings because of the lack of parking and the inability of the authorities to resolve this very serious issue. Therefore, we do not expect the supply to increase significantly from the recent zone review.
In addition, the negative trend in the number of new building permits suggests that there is no increase in the supply of new properties.
There are many unsold properties and even some that were built during the period of overgrowth of the property sector from 2005 until 2008. These are mostly standard apartments or houses of moderate architectural quality built hastily to satisfy foreign buyers especially the British (mainly in Paphos and Larnaca). There are also similar properties in Nicosia and Limassol that were built for Cypriots on the periphery of the main towns and because there buyers have more choices now where they prefer the higher quality ones.
Apart from bad psychology, it is clear that demand for properties was adversely affected by the lack of financing and high interest rates. The interest rate for loans is steeply higher than three years ago and this raises the final cost of new properties.
Banks in recent years have been applying strict criteria to approve a loan, in contrast to what happened previously, and because of increased bad debts that have significantly decreased the availability of new loans in the sector.
Building costs continue to rise, despite the crisis, which slows the downward trend of prices. Building materials and labour not only did not decrease but continue to increase. There was a slight decline in the prices of finishing material, such as floors, air conditioners, etc.
There is still more demand for better quality/design properties as compared to the mass production ones that are not in prime locations for which it is difficult to find buyers.
Concluding, buyers’ psychology will improve as soon as the large volumes of natural gas is verified. The Central Bank and the Ministry of Finance should intervene as it is unacceptable to have the highest interest rates in the EU. We must take lessons from Greece’s mess and reduce the size and cost of government and improve its inefficient and cumbersome procedures.
An incentive that was just offered to potential buyers is the reduction of transfer fees for 6 months. This, in combination with reduced VAT, may jump-start the market. But to keep it going we need steady flow of cheap financing.
With the above combination of negative and positive factors it is highly risky to make predictions about both the direction and the speed of changes in property prices.

George Mouskides is Manager, FOX Smart Estate Agency, and Chairman of the Association for the Promotion of Property Development.