Probably the most significant event that has taken place this year was the ousting of the Communist government led by Demetris Christofias and its replacement with a government led by Nicos Anastasiades of the right-wing Democratic Rally Party.
One of the first tasks the new Cyprus government undertook was to sign a Memorandum of Understanding (MoU) with the Troika for a €10 billion bailout contingent on it raising €5.8 billion from a bank deposit levy.
The previous government, under the leadership of Christofias, kept the country solvent by borrowing €2.5 billion from Russia. This enabled Christofias to avoid signing any bailout agreement – preferring instead to leave it to the incoming government to take the blame for the country’s economic collapse. The agreement was eventually signed almost a year after the Communist Christofias government had approached the EU for a bailout, by which time its terms had got significantly harsher!
The Troika recognised that Cyprus needed to resolve ‘issues’ with its property market and the MoU contains a number of targets that Cyprus must achieve to secure tranches of bailout funding.
The first of these targets, which the government achieved, was to ensure additional revenues from property taxation of at least €75 million – and our article on how to get a discount on your Immovable Property Tax bill was the most read editorial piece of the year.
The most worrying concern for many home buyers is the treatment of developer bankruptcies, which are on the increase, and non-performing loans.
People of all nationalities have been deceived – and are possibly still being deceived – into buying property built on land that developers had previously used as collateral to secure mortgages from their bank. Some of these developers have filed/been forced into bankruptcy and liquidators have been appointed by the courts to sell off the companies’ assets to repay their creditors. In a number of cases these assets include homes that people have purchased and paid for in full.
Although selling off peoples’ homes to repay defunct developer’s creditors may be legally ‘acceptable’, it is morally reprehensible – and I know from the worried and angry people who have contacted me, many would rather torch their homes than give in to the shameful demands of liquidators. As a consequence of the virtual collapse of the Cyprus property market, it is likely that more bankruptcies and liquidations will follow next year.
Non-performing loans are another worry. Last month Politis, a Greek-language newspaper, published the names of a number of well-known developers with risky loans with the Bank of Cyprus that had been refinanced even though it should have become obvious to the bank that these loans had become toxic (the technical term for this is ‘extend and pretend’). I would not be surprised if the ‘extend and pretend’ principle has been applied by some of the other banks to developers’ loans.
If the seizure and sale of non-performing loan collateral takes place within 1.5 years or 2.5 years in the case of primary residences (as required by MoU) many more people face the prospect of losing their homes even though they may have paid for them in full. As legislation needs to be in place by the end of 2014, property seizures will not start until mid-2015.
The government and the Troika will have to work out a solution to this problem otherwise the island’s property market will never recover if people have their homes seized and sold to repay their developers’ creditors or if they are forced to repay some of the developer’s debts to keep their homes.
The MoU also requires Cyprus to eliminate the title deed issuance backlog to less than 2,000 cases of immovable property sales contracts with title deed issuance pending for more than one year; progress is slow!
Property sales continued to fall during 2013, with the total number sold during the first 11 months of the year standing at 3,338; the lowest number on record.
Meanwhile prices have also continued their downward trend with the average price of a residential apartment falling by 14.6% and the price of an average house falling by 11.1% over the 12 months to the end of Q3.
Prospects for 2014
What are the prospects for 2014? They are not encouraging. The downturn in the island’s economy, much stricter borrowing criteria (based on an ability to repay rather than the value of collateral), a weakening demand from homebuyers and investors does not bode for the coming year.
We may take some comfort from the fact that the Troika has recognised that Cyprus needs to resolve problems with its property market. Perhaps we can cautiously look forward to some encouraging news in the New Year on how Cyprus intends to meet its bailout obligations without seizing the homes of those who have paid for them in full.