Residential house prices in Cyprus show no signs of overvaluation in international comparison, while prices are aligned with economic fundamentals, however, still-high household debt poses a risk, an IMF study on the Cyprus housing market found.
The research named “Residential Property Price Developments and (Mis)alignments in Cyprus” stressed that regional disparities raise some concerns about affordability, notably in Limassol, calling for supply-side measures to increase housing supply.
The price increases did not slow down after the termination of the citizenship by investment programme in November 2020. Contrary to expectations, even after the Russian invasion of Ukraine, prices in Limassol did not decline but, on the contrary, increased by 15% in nominal terms from the first quarter of 2019.
“This was due to strong domestic demand and a new increase in external demand (by approximately 30% from the first quarter of 2019 to the fourth quarter of 2022), possibly due to new immigration from Russia and Ukraine and the influx of companies and workers in the technology sector in this region.” Overall, external demand appears to be a significant driving force behind regional disparities in the real estate sector in Cyprus.
The report’s authors note that the price-to-income ratio (PIR) for properties remains low compared to other countries. Price-to-income ratios from the Numbeo platform (2023) reveal that the PIR index in Limassol was about one-fifth higher than in Nicosia and about one-third higher than in Larnaca, Paphos, and Famagusta.
The report states that “compared to other countries, affordability in Cyprus, including Limassol, is much better than in other cities in the wider region. In Thessaloniki and Athens, for example, the price-to-income ratio is approximately double. In Tel Aviv, Valletta (Malta), and Beirut, the index is even higher.”
As explained by the report’s authors, “Despite some uncertainty regarding the reliability of these numbers, this comparison indicates that cities in Cyprus remain relatively affordable and attractive destinations for foreigners.” The report even suggests that policymakers could consider various measures to contribute to price reduction, such as reintroducing property taxes, which have been proven to lower prices both in the short and long term in OECD countries.
Regional inequality is somewhat higher for rentals, the report states, as rents are higher in Limassol. According to data from the Numbeo platform (2023), the rent-to-income ratio in Limassol is one-fourth higher than in Larnaca and one-third higher than in Paphos.
Although various indicators suggest that housing market prices do not deviate from fundamental values, there are still some risks, noted in the report, particularly for vulnerable households, especially if demand from foreigners intensifies.