EXTENSIVE coverage was given to the fall of rental and sale prices of property in the first two quarters of this year, reported by RICS (Royal Institution of Chartered Surveyors). The property bubble financed by easy bank credit, which saw real estate prices soar to absurd levels has been deflating in the last couple of years, the only surprise being the slow rate at which this has been happening.
It appears the rate of decline of prices would be slower than was initially expected and the correction of the market would take longer to be completed. This is because the banking sector is still in disarray and there is uncertainty about its future, not to mention the capital restrictions. These factors are slowing down the correction, but once the banks start to sell off collateral used as security for loans that are not being repaid, property prices would go into free-fall, until they are at a level that is attractive to speculators with cash. Press reports yesterday suggested that Central Bank restrictions on real estate purchases would be lifted next week.
The difference from the stock market bubble of 1999 is that real estate will always have some value, in contrast to shares, and would eventually appreciate. On the minus side the collapse in property prices would have much more far-reaching consequences than the stock market crash, as it would drastically restrict the ability of businesses to secure loans – if and when bank credit is available – and impose big losses on people who borrowed money to invest in property.
The news made a mockery of political party plans to impose a 20 per cent reduction on the rents of shops which fell by nine per cent in the first quarter of this year and by 12 per cent in the second quarter. So the 20 per cent reduction of rents had already taken place; a reminder that the market takes care of prices much more effectively than meddling politicians pandering to potential voters. Rents, particularly for commercial properties, will keep falling as the economy contracts and more companies go out of business.
The law of demand and supply will take care of rental and sale prices of property much better than politicians would ever do. The market will adjust to the new economic conditions. But in Cyprus it seems that everyone is a supporter of free market rules when prices and profits are going up, opposing all regulation (like tighter credit which would have limited the scale of the property bubble) but when the inevitable downturn arrives they want to impose controls the market.