Many of my thirty something friends, having recently moved to Cyprus from studies or work abroad, mostly in the UK, are now considering options for long term accommodation; either to buy a ready-made house, build a new one, or buy a flat. Many of them work in finance or law and are more than competent to do the number-crunching necessary for an informed decision. They are perfectly equipped to quantify the pros and cons of whether to sell a flat, buy a plot, how much of their savings (if any) would they need to use, what mortgage to take and what income shall be generated from the renting of any existing property they own. I find interesting that, in many of these discussions, the assumption is made that current property prices, particularly for rent, will remain roughly the same, not only for the shorter term but also for the medium term. I don’t think this is the case.
In the past few months, the EU Commissioner for Justice has been increasingly vocal against the golden visa schemes, which largely skew the property market and which are widely used in countries such as Cyprus, Malta and Portugal to attract foreign investors. The Commissioner said that these schemes enable potentially dangerous individuals to access the EU. Likewise, the OECD raised concerns for the increased risk of tax evasion posed by these schemes. Such concerns are well founded. The visa schemes tend to attract oligarchs, particularly from countries with questionable democratic credentials. In practice, the investments are directed towards high-end property, which spark the overall property prices. The higher the demand, the greater the number of properties and areas that suddenly become posh. As a result, affordable housing diminishes. Nowadays, it is not uncommon to see non-exceptional, smallish flats, which used to go for EUR 400 per month, to be rented out for more than EUR 700, despite an increasing number of people being at risk of poverty.
One other factor to consider is the changing landscape in relation to the granting of housing loans to consumers. Contrary to the open door policy adopted before the financial collapse of early 2013, banks are now ever more scrupulous when examining applications for mortgage funding. In consequence, only a fraction of those who would be able to access the housing ladder pre-2013 can do so now, which leads to an increase in demand for rented accommodation. This further fuels the increase in rent prices as people have no option but to rent at high prices.
It is therefore these two forces — investment schemes and stricter screening for mortgages — that justify the increase in prices both for buying and for renting property. I think this trend cannot and will not be sustained for the longer term.
The recently introduced banking regulations will remain and likely get even stricter, and for good reason; had such regulations been in place Cyprus wouldn’t be having so many non-performing loans.
The same cannot be said for the investment schemes. It is quite unlikely that these schemes will remain in effect for long, despite the government’s cheeky attempts to demonstrate that they are on top of the situation by imposing an annual ceiling which exceeds the total number of applications per year (the cheeky bit). At the same time there is absolutely no transparency as to the revenue generated by these schemes, rumored to be at 4-5% of the GDP. If the estimates are indeed correct, the growth celebrated by the government will be artificial and immediately reversible, as will the effect on property prices, which will likely fall.
Another factor to consider are the properties tied to non-performing loans, which are gradually transferred to the subsidiary companies of the local banks. These properties will eventually be sold, and the increase in supply of available property will also negatively affect the property prices.
I acknowledge of course that it is not easy to determine what percentage of the increase can be attributed to the banking regulations and what to the investment schemes, but suffice to say that, whatever the case, a demise of the golden visa schemes will have a negative impact on the property prices.
If it were me and had to calculate my ability to repay a mortgage whilst factoring in income from rent, I would deduct a hefty percentage from current rent price and value.