Think Housing Prices in Cyprus Are Already Mad?
Wednesday, January 17th, 2007Once perceived as just another tourist destination, Cyprus has evolved into much more, thanks to the approaching EU enlargement. For a potential half - billion people, Cyprus is now a place to work, raise a family, operate a business and retire.
This new vision of Cyprus has construction companies working around the clock, new roads and marinas under construction, more EU companies looking at the Cypriot market, and increasing numbers of young EU citizens migrating there. Also, the government is planning to introduce VAT on property purchases. In other words, Cyprus Real Estate is on the rise.
According to current Cyprus law, a non-Cypriot can purchase as much Cyprus Real Estate as he likes but he’s only permitted to transfer one house or one plot of land up to 4,000 sq. meters in his own name. Also, Cabinet approval is required before the deed can be transferred. The exception to this is if the person has lived and worked on the island for many years, in which case he might be granted permission to own a second home.
This restriction may soon be lifted, however, once EU accession is complete. At that point every EU citizen will be allowed to work, settle and move freely in the EU. Nevertheless, Cyprus has negotiated a transitional period for the next five years regarding the lifting of restrictions on secondary residences. In other words, EU citizens will still not have exactly the same rights as Cypriots when it comes to owning property on the island until 2009.
Loizou, a property analyst, believes that Cyprus Real Estate prices could jump by 30 – 50% by then. “There will be a huge rush to buy before VAT comes on. But the freedom of movement and labor that comes with EU accession will increase demand for Cyprus Real Estate considerably,” he said. “At the moment, only foreign retirees buy property for their own use. Once restrictions are lifted we will have a younger generation of purchasers wanting to work here, investors buying up houses and leasing them, companies investing provident funds, and eight new member states with no sea and sun. That’s millions of people,” Loizou added.
Loizou also pointed out that EU accession would open Cyprus Real Estate to a market with a high standard of living, making leisure time cheaper for its citizens. “Air fares will eventually go down with cheap, no frill flights, like EasyJet, coming to Cyprus. This removes a major obstacle to Cyprus. It also means another boost to the Cyprus Real Estate market. Prices will not be falling,” he said.
“Prices will continue to go up. There’s a lot of construction activity and infrastructure development at the moment. Not only is Cyprus becoming a top destination for retirement, but also, younger people are coming here because they see it as an investment,” said Hadjikyriakou.
Loizou also noted that the government’s plan to impose a VAT on property purchases will also cause an increase in property prices: “VAT is going to cause us a lot of problems. But we don’t have a choice; we have to impose VAT on property purchases. The government might abolish transfer fees to offset VAT, but they only account for 5-8 per cent. Compare that to 15 per cent. Buying will definitely be more expensive,” said Loizou.
Regarding the transitional period for VAT on land purchases and the fact that full VAT will have to be paid on houses from the time of accession on May 1, Loizou believes it will hurt locals:
“This is bad news for locals. If you own property, it might be worth more, but once you sell it, other properties will be just as expensive,” warned Loizou. “Cyprus Real Estate Prices will increase gradually, at least by 20-30 per cent by 2009. But if you add five per cent related inflation to the increase in demand from EU countries as we come nearer to 2009, because there is less risk in buying two years before the restrictions are lifted, then prices are more likely to rise by 50 per cent,” he said, adding, “after 2009, God help us.”
Hadjikyriakou contends that the government should step in if Cypriots can’t compete in the property market. “Many Cypriots cannot afford it. Those that don’t already have property will find it very difficult. Newlyweds are also having a hard time and are obliged to rent where possible. The government is not helping.”
According to one government source, presently there is no plan to eliminate transfer fees as a balance against VAT. “This issue was not raised during the tax reforms and currently there are no plans to do that. But that doesn’t mean it wont be addressed in the future.” The source emphasized that the reduced interest rates did help alleviate the rising prices. “One can see interest rates further decreasing or staying at current low levels. This should help people who wish to buy residences.”
Of course, if a solution to the Cyprus Real Estate problem is found, the perspective on these problems will be different.
“It depends on what type of solution we end up with. Other things being equal, and if they give back Varosha, then there will be a shift in the population which could lead to stagnation in property prices in residential areas,” said Loizou.
The Annan plan is not yet in effect and it’s still not clear whether the plan would restrict Turkish Cypriots from moving to the south and Greek Cypriots from moving the north. It’s also unclear whether EU citizens will face similar restrictions.
“If the Europeans can buy in the north freely, then they are more likely to do so. But an overall solution will encourage investment both in the north and south,” said Loizou. “Overall, it could lead to two or three years of price stagnation in the Cyprus Real Estate market in the south. It all depends on the solution. It will take years to sort out the land and property issue. However, there will be a gradual, not major effect.”
As things stand now, a wait-and-see approach seems best. A sudden rush to buy immovable property could cause dramatic price increases and the implications of the VAT are still not completely clear.