Monetary policy decisions directly affect the economy by influencing how much households can spend, invest, and consume. This was highlighted in a recent article by European Central Bank (ECB) economists Niccolò Battistini and Johannes Gareis.
The housing market plays a crucial role in this process, as mortgage interest rates determine property transactions, which in turn impact household spending on goods and services.
The impact of interest rates on housing affordability
Between 2022 and 2023, the ECB raised its key interest rates at a historically fast pace to curb inflation, before beginning a gradual reduction at the end of 2023.
These changes were immediately reflected in housing affordability, measured by an index that compares income, property prices, and mortgage instalments.
The index has shown significant fluctuations: from its lowest point during the 2008 financial crisis to its highest in 2016, followed by a steady decline from 2017 and particularly in 2022.
Although affordability has been slowly improving since mid-2023, it still remains below 2021 levels.
Key factors and effects on consumption
From late 2021 to 2023, rising interest rates placed greater pressure on buyers than could be offset by income growth or price corrections, leading to fewer property transactions and reduced household consumption.
According to the ECB’s analysis, a 25-basis-point increase in short-term interest rates can reduce housing sales by 2% and household goods consumption by 0.3% over three years.
The so-called “housing sales channel” is proving to be a decisive mechanism in transmitting monetary policy to consumer spending.
The 2022–2025 period
The years 2022–2023 were marked by a sharp decline in affordability, resulting in a drop of about 10% in household goods consumption and a reduction of overall private consumption by 0.6 percentage points.
Since 2024, stable interest rates and rising incomes have supported a modest recovery, which is expected to continue into 2025.
Outlook and uncertainties
The outlook for the coming period appears positive, with improving affordability boosting both property transactions and household consumption.
However, ECB analysts warn that factors such as trade uncertainty, US tariffs, and geopolitical tensions may slow down this recovery.
Housing affordability in Cyprus
Housing affordability is a growing concern in Cyprus, especially for young couples, as home ownership becomes increasingly difficult.
According to Central Bank data, the average mortgage interest rate rose noticeably in June, reaching 3.97% compared with 3.74% in May.
For fixed-rate mortgages up to one year, the rate increased to 3.95% in June from 3.81% in May, placing Cyprus fifth highest in the eurozone and above the euro area average of 3.61%.
Meanwhile, for fixed-rate loans between one and five years, Cyprus recorded 3.09% in June, slightly down from 3.16% in May, and below the euro area average of 3.41%.
The Housing Price Index (HPI) from the Statistical Service of Cyprus stood at 113.71 points in Q1 2025, marking a 2% rise compared with the same period last year.
At the same time, the Central Bank’s Residential Property Price Index recorded a 4.8% annual increase, with detached house prices rising 5.6% and apartment prices up 3.5%.
Yet, Cyprus slipped to 42nd place in the Knight Frank Global House Price Index for Q1 2025, with a nominal rise of 2% and a real increase of just 0.4%, continuing its downward trend from 2023 when prices had surged by 8.5%.
