House prices in Cyprus continued to rise during the third quarter of 2022, primarily due to elevated construction costs and increased demand from both foreign and local buyers, according to a report released this week by the Central Bank of Cyprus.

According to the report, the central bank’s House Price Index (CPI), which refers to houses and apartments, continued its upward trend in the third quarter of 2022, increasing by 2.1 per cent, compared to a 1.7 per cent increase in the previous quarter.

In addition, the index experienced a 6.3 per cent year-on-year increase, compared to a 4.7 per cent increase during the second quarter of 2022.

The main factor for the rise in house prices, the central bank explained, continues to be the rise in construction costs, combined with the increase in demand, something which has been well-documented by real estate market analysts.

Furthermore, real estate transactions also grew at an accelerated pace during the first nine months of 2022, according to sales document data by the Land and Survey Department.

This has been primarily attributed to year-on-year increases in demand from both domestic and foreign investors.

Inflationary pressures, which have a significant impact on construction costs, continued to have an effect during the third quarter of 2022, without, however, having a material negative impact on demand.

Moreover, the increase in borrowing costs due to the ECB’s key interest rate hike appears to have weighed on mortgage demand in the third quarter of 2022, potentially weighing on future construction activity.

Resilience despite market uncertainty

According to the central bank’s report, the House Price Index (CPI) rose by 2.1 per cent quarter-on-quarter during the third quarter of 2022, compared to a quarterly increase of 1.7 per cent during the second quarter of the same year.

The House Price Index’s rise comes from a 2.2 per cent increase in apartment prices over the previous quarter and a 2 per cent increase in house prices over the same period.

On a year-on-year basis, house prices grew by 6.3 per cent in the third quarter of 2022, compared to 4.7 per cent in the second quarter of 2022.

Apartment prices during the quarter under review recorded a year-on-year increase of 8 per cent, while house prices rose by 5.2 per cent.

The central bank noted that “the real estate market, despite ongoing high uncertainty stemming from external geopolitical developments, is exhibiting resilience, with the acceleration in house prices continuing during this quarter”.

“As in previous quarters, the increase is primarily attributed to the rise in construction costs, which is reflected both in the prices of apartments and houses,” the central bank added.

In addition, the central bank also linked the rise in residential property prices to the increase in demand from both foreign and domestic investors, something which is backed by the aforementioned data provided by the Land and Survey Department.

Meanwhile, the small rise in lending rates during the third quarter of 2022 has so far not affected deposit rates, keeping the property market as an attractive investment option, as the property market yields a higher return through rental properties than the interest generated from deposits.

The most important impetus to the demand for real estate purchases by foreign investors seems to have been exerted by the arrival of many foreign professionals to Cyprus, a result of the relocation of many companies’ international headquarters to the island.

The companies that set up offices in Cyprus are mainly active in the financial services, shipping, technology, information and communication sectors, and are primarily concentrated in Limassol and Paphos.

At the same time, Larnaca has also seen an increase in activity in this segment of the market.

According to data from the Ministry of Energy, Trade and Industry, more than a thousand companies of foreign interests registered in Cyprus as part of the relevant relocation scheme during 2022.

Residential prices rose across all districts

In the third quarter of 2022, house prices increased in all districts, when compared to the previous quarter of the same year.

In more detail, an increase of 1.2 per cent was recorded in Nicosia, 3 per cent in Limassol, 1.2 per cent in Larnaca, 2.6 per cent in Paphos and 2.3 per cent in Famagusta.

In addition, a year-on-year increase in residential prices was recorded across all districts in Cyprus.

In Nicosia, house prices increased by 4.4 per cent, in Limassol by 8 per cent, in Larnaca by 2.8 per cent, in Paphos by 8.2 per cent and in Famagusta by 8 per cent.

Moreover, on a quarterly basis, house prices recorded increases in all districts.

In Nicosia, apartment prices increased by 1.3 per cent quarter-on-quarter, in Limassol by 2.8 per cent, in Larnaca by 0.6 per cent, in Paphos by 2.6 per cent and in Famagusta by 2.3 per cent.

On an annual basis, house prices also grew across all districts. Specifically, house prices in Nicosia, Limassol, Larnaca, Paphos and Famagusta increased by 4.1 per cent, 6.7 per cent, 1.1 per cent, 7.4 per cent and 6.5 per cent, respectively.

Apartment prices on a quarterly basis recorded an increase in all provinces.

Specifically, in Nicosia, they increased by 1.1 per cent quarter-on-quarter, in Limassol by 3.2 per cent, in Larnaca by 2.6 per cent, in Paphos by 3.3 per cent and in Famagusta by 2.6 per cent.

Furthermore, on an annual basis, apartment prices also increased across all districts.

In Nicosia, apartment prices increased by 4.9 per cent year-on-year, in Limassol by 9 per cent, in Larnaca by 7.2 per cent, in Paphos by 11.9 per cent and in Famagusta by 12.9 per cent.

Property sales rise significantly

According to the most recent data from the Land and Survey Department, the number of property sales continued to increase in the third quarter of 2022, rising by 33.8 per cent year-on-year during this time.

In total, there were 3,347 property sales during the third quarter of 2022, compared to 2,502 during the corresponding quarter of 2021, reflecting the increased demand for real estate.

Additionally, during the quarter under review, there was a 67.3 per cent year-on-year increase in the number of properties sold to foreign buyers, with 1,506 such transactions, compared to 900 during the same quarter of the preceding year.

The report explained that this was driven by a 32 per cent increase in purchases by EU residents, as well as an increase of 104.1 per cent by non-EU residents.

Overall, during the first nine months of 2022, the number of sales increased by 37.2 per cent compared to 28.6 per cent in the previous year.

The increase from local buyers amounted to 17.4 per cent while from foreign investors there was a much more significant increase of 76.7 per cent.

According to market sources, demand from local investors was concentrated on older properties, which are ready for delivery or even second-hand properties, which are likely to be bought at a lower price before subsequently being renovated.

Along with the increase due to the relocation of international companies’ headquarters, the war in Ukraine continues to create demand in the real estate market from entrepreneurs and investors from both Russia and Ukraine.

Higher interest rates have negatively affected loan demand

At the same time, inflationary pressures and, by extension, the rise in key ECB interest rates seem to have negatively affected the demand for new housing loans.

According to the Central Bank of Cyprus’ Monetary and Financial Statistics report, new housing loans decreased by 12.3 per cent year-on-year in the third quarter of 2022, while they also dropped by 6.7 per cent when compared to the second quarter of the same year.

In total, new housing loans amounted to €238.8 million in the third quarter of 2022, compared to €273 million in the third quarter of 2021, and €256.1 million in the second quarter of 2022.

Also, according to the same report, the home loan interest rate continued to register increases during the third quarter of 2022, having averaged a rate of 2.72 per cent during this time, compared to 2.27 per cent in the second quarter of 2022.

What is more, further increases in mortgage rates are expected in the future given the rate hike by the ECB.

According to a relevant banking sector survey, lending criteria tightened during the third quarter of 2022, compared to the previous quarter.

Finally, according to data provided by the Cyprus Statistical Service (Cystat), the number of residential units for which building permits have been approved, a preliminary indicator of construction activity, recorded a decrease of 7.3 per cent year-on-year between January and September 2022.