Increased Cost of Living and Property Prices

The ECB reports that housing costs for eurozone households have risen significantly. In January 2024, the average household spent €765 per month on total housing costs, including utilities, maintenance, and rent or mortgage payments.

From July 2022, the start of the interest rate hike cycle, to January 2024, housing costs increased by approximately 10.2%, outpacing the 5.5% rise in the Harmonized Index of Consumer Prices (HICP). This sharp increase is partly due to the rapid rise in energy prices, which peaked in 2022 but have since shown signs of stabilization.

Variations in Housing Cost Increases

The increase in housing costs has varied across different types of households. Homeowners saw a 6% rise due to higher maintenance costs, despite a slight decrease in utility costs from recent energy price stabilization. Mortgage holders experienced a 12% increase primarily due to higher interest rates on variable-rate and new mortgages. Renters faced a 9% increase, driven by rising rents and utility costs, with less flexibility to absorb unexpected expenses.

Significant Heterogeneity Between Countries

Housing costs differ significantly across eurozone countries, with notable disparities between costs excluding mortgage payments and those including them. Countries like Italy and Spain, with higher shares of adjustable-rate mortgages, are particularly affected. This heterogeneity reflects varying national policies on housing and mortgage regulations, as well as different levels of economic resilience and energy dependency among eurozone nations.

Income Growth Offsetting Costs

Since 2022, nominal income growth has largely offset increased housing costs, keeping the ratio of housing costs to income relatively stable. The housing cost index, defined as total housing cost divided by disposable income, has remained unchanged since early 2022. Housing costs account for about 20% of disposable income for homeowners, 40% for renters, and 35% for mortgage holders. However, this ratio varies by income group, increasing slightly for the top 20% of incomes among mortgage holders and renters, but staying stable for the lower 50%.

Higher-income households are more likely to take out larger mortgage loans, while lower-income households have benefited from recent targeted income support measures by eurozone governments. Nonetheless, many lower-income households remain burdened by housing costs.

Future Implications for Housing Investment

There is growing concern about households’ ability to meet housing costs and mortgage payments, especially those with lower incomes. More households, particularly lower-income ones, have reported expectations of delayed rent or mortgage payments and utility bills. This trend highlights the financial vulnerability of these households amidst ongoing economic uncertainty.

The future trajectory of housing costs is crucial for housing investment prospects in the eurozone, as increased interest rates and inflation continue to impact purchasing power and financial stability. The European Central Bank’s monetary policy and the overall economic health of the eurozone will play significant roles in shaping these outcomes. Furthermore, with the potential for further geopolitical instability or supply chain disruptions, housing costs may continue to be a critical issue for eurozone households.

Addressing these challenges will require coordinated efforts from policymakers to ensure affordable housing and financial support for those most affected by rising costs. Long-term strategies may include investing in energy-efficient housing to reduce utility expenses, promoting affordable housing projects, and implementing measures to stabilize the housing market.

Cyprus Economy Update

Economic Growth and Challenges

Cyprus has shown resilience in its economic recovery post-pandemic, but challenges remain. The island’s economy grew by 4.1% in 2023, driven by strong tourism, real estate, and professional services performance. The government has implemented various measures to boost economic growth, including incentives for foreign investment and digital transformation initiatives.

However, Cyprus faces several challenges that could impact its economic stability. Rising inflation, driven by increased energy and food prices, poses a significant risk. In June 2024, inflation reached 5.8%, putting pressure on household budgets and business costs. The Central Bank of Cyprus has expressed concerns about the potential impact on consumer spending and overall economic growth.

Housing Market Developments

The housing market in Cyprus has experienced a significant upturn, with property prices increasing by 8% in 2023. Demand has been fueled by foreign investors seeking residency through the country’s investment programs and a surge in domestic buyers taking advantage of low interest rates before recent hikes. However, this has also led to affordability issues for residents, particularly first-time homebuyers.

Energy and Environmental Initiatives

Cyprus is also making strides in energy and environmental sustainability. The government has launched several initiatives to transition to renewable energy sources, aiming to reduce its dependence on imported fossil fuels. By 2030, Cyprus aims to generate 40% of its energy from renewable sources, with substantial investments in solar and wind power projects.

Banking Sector Stability

The Cypriot banking sector has shown signs of stabilization, with non-performing loans (NPLs) decreasing to 12% in early 2024, down from 15% in 2022. Banks have improved their capital positions and liquidity, partly due to regulatory reforms and better risk management practices. However, the sector remains cautious about potential economic shocks and continues to focus on strengthening its financial health.

Future Outlook

Looking ahead, Cyprus is poised to continue its economic recovery, albeit with caution. Key focus areas include further diversifying the economy, enhancing digital infrastructure, and promoting sustainable tourism. The government is also committed to addressing social issues, such as affordable housing and income inequality, to ensure inclusive growth. While Cyprus’s economy is on a positive trajectory, it must navigate global economic uncertainties and domestic challenges to maintain its momentum. Effective policy measures and international cooperation will be crucial in sustaining long-term growth and stability.

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