Increased inflation, rising interest rates, rising building costs, rising property values, a slight decline in new development approvals, a slight decline to stabilization in the unemployment rate, a slight increase in GDP, and a slight decline in private lending are just a few indicators of the (very) general economic picture.
As a result, many people with direct or indirect involvement in the real estate sector are wondering whether this means a decline or stabilization is taking place, or whether an upward trend will continue - and apparently acting accordingly. Of course, there are those who have no intention of doing anything but show an 'encyclopedic' interest for the sake of discussion with a group of friends.
Let's try to untangle the web and see where it takes us.
The large increase in inflation that followed the anti-pandemic policies, as well as its aftermath, stimulated real estate investment. We have repeatedly emphasized the nature of real estate as an anti-inflationary barrier, and this nature appears to have been confirmed by the current wave of inflationary pressures. Although the fiscal fight against inflation is intense and determined and appears to be succeeding since a reversal of its course, the road to its complete containment and limitation to near the 2% level remains long. As a result, the inflation parameter should continue to encourage real estate investment. Is this, however, sufficient?
Interest rate increases are the most effective weapon against inflation because they discourage borrowing through them. Borrowing is an economic growth driver. Thus, restricting lending prevents the economy from overheating and, as a result, deflates the general price level, resulting in lower inflation. At the same time, the cost of servicing existing loans rises in many cases. As a result, borrowers are being financially squeezed, and some will inevitably default. The only thing that is reassuring - if it can be called that - is that this is seen as a temporary rather than permanent phenomenon because it is intended to curb inflation, and if this is achieved, interest rates will gradually begin to fall. It should also be noted that, while interest rates are higher than they were before the war and the pandemic, they are still low in comparison to what we knew 10 to 15 years ago. In any case, the current interest rate levels are certainly discouraging some people from borrowing to invest, and this factor is reducing demand for purchasing property.
Construction costs have undoubtedly risen as a result of unresolved supply chain issues and an increase in energy costs that have been exaggerated by the war. Construction costs have historically risen. Expecting it to fall - especially to such an extent that it is noticeable - is difficult, if not impossible. Indeed, with so many new regulations on requirements constantly entering the picture (for example, see energy efficiency), the trend will be upward. And we are not only talking about increases in material costs but also in labor costs because all of these requirements necessitate the acquisition of expertise, which costs money. As a result, construction costs, which are a major factor in determining sales prices, will raise the asking prices for real estate sales. Investors/buyers/tenants/users will need to adjust to this new environment, which will result in reallocations.
The rate at which new construction projects are planned and permitted will reflect current and expected market conditions. Forecasts of increased demand signal an increase in supply, while forecasts of decreased demand signal an increase in supply. Furthermore, new requirements, increased costs, increased debt obligations, and increased risk reduces the number of people involved in the business, resulting in a reduction in supply. Now, the impact of reduced supply on prices is unclear. If demand falls significantly, prices fall. However, if the reduction in demand is subtle, we may see price stabilization; if demand continues to rise, we may see large price increases despite reduced supply.
In Cyprus at the moment, we are witnessing the phenomenon of a limited stock of existing properties for sale, a slight decrease in new permits and thus a decrease in new supply, while domestic demand is showing slight negative trends and demand from foreigners is increasing. Overall, this causes shortages in specific property categories as well as price increases for both purchase and rental.
Unless something unexpected happens, this trend is expected to continue into 2023.
[This article was translated from its Greek original]