To Buy or Not To Buy?
By Thanasis Athanasiou

According to The Economist magazine, average house prices in America have risen by 65% over the past seven years. During the same period prices have more than doubled in Britain, Ireland and Australia. This global trend in property values has raised serious concerns about whether the cost of real estate will continue to spiral ever upwards or whether the boom is about to bust.
Technically; in order for prices to fall, demand for houses has to decrease. In reality this is never going to happen. What will happen is that instead of buying, people will rent. In practical terms, renting must be cheaper than buying a house and taking out a mortgage for demand to shift to the rental market.
It is true that currently it makes better financial sense (at least for first-time householders) to rent, given that house prices worldwide are at a record level compared with rental prices. For many it is better to rent than buy if the absolute value of the alternatives is compared, though many would argue that paying rent is ‘pouring money down the drain’. House prices have risen steadily while rents have risen modestly. This has reduced yields on investment property and made it less attractive.
As reported in The Economist, a 2-bedroom flat in London with a value of £450,000 Sterling can be rented for £1700 a month. The annual rental income would be £20,400. This represents a yield of 4•5%. In Cyprus, a typical 2-bedroom flat has a value of about 60,000cyp and can be rented for 3600cyp per annum. This is a yield of 6%. To buy the same home would cost you 6% interest on the mortgage plus 1% annual maintenance and insurance costs. At first glance, renting is cheaper than buying. However, these examples take no account of future capital gains. Gain in value is a reason in itself to acquire a property, regardless of potential income. Global housing markets indicate that, although the upward spiral will not continue, any property will continue to increase modestly in value.

What’s the situation in Cyprus?
The president of the Cyprus Real Estate Association (CREA) argues that here the market is different from the international market. Market prices are driven by high foreign as well as domestic demand. Since this is a small country, restrictions on housing supply will always keep demand relatively high. Prices have gone up by 25% in the last 2 years and are expected to rise by 10% in 2005. In the future, Cyprus’ entry into the Euro zone will necessitate a reduction in interest rates. This will give further impetus to domestic property demand. EU accession has ensured prosperity for the country.
It is expected that tourist visits will double in the next 4 years. This is significant, since surveys have shown that demand for foreign property follows holiday patterns. Foreign buyers tend to but property in countries they have visited before. It is therefore reasonable to expect foreign demand for properties also to double in the same period.
Alan Greenspan has said that there is no reason for the property market not to do well. This upward trend, he says, is perfectly normal. The nature of the product keeps demand for it stable, with few dramatic changes. Population will always increase and the supply of land will always decrease. People, whatever the price, will always need a place to call home. The wealthy will always seek second homes, holiday homes or solid investment opportunities and older people will always
dream of retiring in the sun.
All in all, although the boom may slow there is no reason to fear a bust.