Rising interest rates deterring home buyers

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Hiking interest rates are prompting Cypriot households to have second thoughts over borrowing money to buy their dream home as demand for mortgages declines rapidly, according to the Central Bank of Cyprus.

The Central Bank recorded a drop in demand for credit amid the energy crisis and inflationary pressures, which are driving up household costs, making it harder to meet or take on new debt obligations.

According to the data, new loans to households showed a decrease of 31% in the first two months of 2023, falling to €191 mln from €277 mln in January-February 2022; compared to 2019, there was a small increase of 0.6%.

As the Central Bank pointed out in its latest economic bulletin, the decrease in new home loans observed in the second and third quarters of 2022 may reflect the end of the government interest rate subsidy for mortgages and the gradual increase in interest rates by the ECB.

In the Central Bank’s latest survey on bank lending, the decrease in demand for housing loans is attributed to high interest rates and the deterioration of consumer confidence.

Regarding new business loans, they recorded an increase of 9.7%, reaching €281 mln in the first two months of the year, up from €256 mln last year.

Compared to 2019, however, there is a decrease of 14.7%.

The total amount of loans channelled by banks to households and businesses, excluding restructurings, was €472 mln in the first two months, down from €533 mln in 2022 and €519 mln in 2019.

According to the Central Bank, demand for new loans has been affected by “uncertainty in the geopolitical and economic environment, higher interest rates and the negative impact of inflation on the real disposable income of households and businesses”.

It said that under increased economic uncertainty and higher interest rates, banks are tightening their lending policy despite a net decrease in demand to prevent new non-performing loans.

According to Central Bank data, new loans granted by banks in 2022 were €3.2 bln, up from €2.9 bln in 2021, an increase of 10%. Compared to 2019, total loans in 2022 recorded an increase of 8.4%.

Cyprus banks’ liquidity is approaching €27 bln, while the balance of deposits in February reached €51.9 bln.

The Central Bank argues that the increase in deposits “probably reflects savings incentives for welfare reasons due to the worsening economic outlook and increased uncertainty.”