Hi guys, thanks for the responses !
Pumpernickle, I am glad you have noticed it too. I think in retrospect people will agree that we are in a bubble, but by then it will be too late. I understand perfectly your points regarding Cyprus not adhering to the laws of economics - but this is simply an anomaly casued by so many years of Cyprus being a closed semi-socialist system. Changes take time to feed through. Cypriots also still have family wealth to fall back on (land etc) and this gives them a cushion which discourages any real innovation or hard work from their side, which might eventually lead to competition and lower prices. Once this cushion disappears (and it is fading very quickly) reality will hit home and we will see a rapid shift in the mentality over here.
As for cars, I must disagree a bit there. I remember coming here on holiday in 1995 with £2,000 and not being able to afford to buy even the oldest car. The Cypriots were selling old cortinas and mark I VW golfs for two and a half grand !!! Cars here have gotten much cheaper, and will get cheaper still once our EU customs derogations expire.
The bursting of the CSE bubble was a classic lesson for the Cypriots in the laws of economics. If you were smart and had half an education you got out early before the crash. Many did not. They thought they would continue to make gains on overpriced worthless shares indefinetly. Those same people are about to get a lesson in the vagaries of the property market.
What leads me to believe we are in a bubble here ? Several things:
1) The 12/20 rule of investment. You should never pay more than 12 times the annual rental income for a property, and sell if it ever gets to 20. For example, if a 2 bedroom flat rents here for max £350, that is £4200 in a year and £50,400 over twelve years. Where can I find a nice new 3 bedroom flat for 50k ? Nowhere. Prices for such apartments have inflated to 80k or more in every town.
2) Real incomes have not increased significantly on the island. In fact we have less disposable income then before as the cost of living has risen and will continue to rise as a result of higher energy costs in the oil and gas markets. This strongly suggests that the rise in house prices is being fuelled by speculation and sentiment, as was the rise in stock prices during the CSE bubble of the late 90's. As any economist worth his salt will tell you, sentiment in markets can change very quickly. Locals simply cannot keep up with the massive rise in house prices on their incomes, so it follows naturally that they will come to a point where they simply refuse to buy, or will buy at a very high level of exposure which leaves them vulnerable to panic selling when things get tough.
3) The CSE is down in the doldrums and has been since the bubble burst. It does not make sense for the stock market to be undervalued while the property market is valued above its long-run trend. Because both are assets, that cannot be sustained. Either people are confident about the future, in which case both houses and shares should be worth a lot, or they are not confident, in which case the prices of both shares and houses should be low (this point has been plagiarized from research by Dr Andrew Oswald).
4) Property sales have declined by 29% year-on-year during the first half of 2005 CYP 442 mln compared to CYP 626 mln in 2004 during the same period, according to the Land Registry figures. I am waiting for the figures for the first half of 2006, I am sure they will be much lower.
5) Prices have risen by more than 20% a year since 2002 according to official estimates. This is not sustainable as salaries have not risen by a corresponding amount. In EVERY property market across the globe where we have seen prices
shoot up so fast, they have come down equally quickly. See the examples of England in the 70's and early 90's, Japan in 1997 and China only recently.
6) There is a presently a global property bubble in full swing of which we are a part:
http://www.economist.com/opinion/displa ... id=4079027
The bubble has been caused by cheap money being lent by central banks. Until recently the Federal Reserve had borrowing rates at 2%, as did the ECB and the Bank of England. Japan has an interest rate of only 0.10%. Interest rates worldwide have now started to rise from these historically low levels, and in a year or so we will begin to feel the effects of this, namely a liquidity squeeze in asset markets, especially property.
Simon, property never goes down in value ???? Obviously you never lived through 70's property crash in England and again in the early 90's.
Andri, my intention was not to provoke a debate regarding whiners and so on. I also love Cyprus. My interests are purely economic in nature - so I will stick to this side of things, in this thread at least.
