THERE is not likely to be any let up in the rise in house prices in Cyprus for the foreseeable future, but experts yesterday ruled out any notion of a bubble.
In June 2005, house prices rose 1.1 per cent over May, according to the BuySell index, the only one published on the island.
The June increase brought house prices to an accumulated 3.6 per cent rise for the first half of 2005, with the BuySell Index rising to 110.7 and the average home price to £86.218.
“In some countries prices go in cycles and in some others they go up or not,” said Stelios Platis Director of S.Platis Economic Research, which has just published 60-page analysis on the Cyprus property market, which was commissioned by BuySell.
Platis said before the BuySell monthly index was formulated, there was no clue as to the property market in Cyprus. He said it was also widely used abroad as in indicator as to the state of the market in Cyprus.
“Whether there is a bubble or not depends on the country and how the financial system of that country works. My opinion is that the chances of a bubble in the Cyprus property market is very small,” Platis said at a news conference yesterday to present the findings of the research.
The study analysed the key factors that that have led to a rise in prices, and also the factors that negatively affect the market. It concluded that liberalisation of the financial sector and a decrease in interest rates led to easier borrowing, an increased demand for higher quality housing and also for second homes.
Platis said that between 1992 and 2001 the population increased by some 90,000, while at the same time the number of people per household declined from 3.23 in 1992 to 3.06 in 2001 and the percentage of owner-occupation increased from 63.8 per cent to 68.2 per cent.
“The inability of the existing housing stock and the construction industry to meet the increased demand led in the short run to house-price increases,” said Platis. “The construction frenzy recorded in the period following interest-rate liberalisation could therefore be explained by the existence of demand that had not been satisfied earlier by the previously existing supply. The inability of the supply side to meet demand for specific locational characteristics may also have led to an increase of the prices of such locational characteristics.”
He also said the increase of land value and construction costs had contributed to the increase of house prices in the long run. “The size of the profit margin for developers (the difference between house prices and construction cost) is decisive in whether new houses are constructed and therefore determines the level of supply of housing in the medium term,” he added.
Platis said the stock market bubble also turned the attention of Cypriots back to property as an investment, something that contributed to increased demand and increased house prices, as did EU accession.
Negative effects on the market included the stabilisation or marginal decrease of per-head disposable income of Cypriots during 2001-2002 and the interest-rate increase of 100 basis points by the Central Bank of Cyprus in April 2004.
“This development contributed to an increase in the cost of financing, restricting demand for housing loans and consequently for housing, thus affecting prices negatively,” Platis said. “Additionally, the directive issued by the Central Bank of Cyprus to the commercial banks, instructing them to grant housing loans of up to a maximum of 70 per cent of the value of a house, may have contributed to the decrease of demand in 2003, since it limited the number of eligible persons.”
Referring to the second home market, Platis said that special circumstances such as oversupply of second homes, relatively high prices and an increase of interest rates in the UK, may have caused a demand decrease – with negative or stabilizing effect on prices – especially after the developments in the Cyprus problem from April 2004 and the opening of the Green Line a year earlier.
“Today, and most particularly from February onwards, the Cyprus housing market is believed to be in a phase of price recovery – a tendency which is expected to continue,” Platis said. “The examination of the current conditions on the Cyprus housing market, based on the study’s conclusions, leads us authors to assume that house prices will probably continue to rise.”
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