The Cyprus housing crisis is being driven primarily by rising demand from high-income foreign residents rather than excessive lending or a property bubble, according to University of Cyprus economics professor Sofronis Clerides.
In an interview with Economy Today, Clerides, Dean of the university’s School of Economics and Management, said government policies had helped increase demand for property while encouraging developers to focus on luxury housing at the expense of homes affordable to ordinary households.
He argued that Cyprus must reconsider how it attracts foreign investment, warning that the country’s capacity to absorb new businesses and residents is not unlimited.
Why rising property prices do not signal a bubble
Clerides distinguished the current housing pressures from those experienced during the financial crisis that began in 2008, when excessive credit expansion contributed to rising property prices.
Housing crises can emerge from increased demand, insufficient supply or a combination of both, he explained. In Cyprus, he believes the main factor is the substantial influx of foreign residents with high incomes.
“This is not a bubble,” Clerides told Economy Today, explaining that the current increase in prices is driven by external demand rather than borrowing.
Property bubbles typically develop when excessive lending fuels purchases and collapse when credit becomes unavailable. Clerides said that while a sudden fall in demand could still lead to lower prices, the risk is considerably smaller than in a conventional credit-driven bubble.
Government policies and the shift towards luxury homes
Over the past decade, Cyprus has introduced several policies that have influenced housing demand, including its former citizenship-by-investment programme, incentives attracting foreign companies and workers, and measures supporting the establishment of international business headquarters.
Clerides said these policies had contributed to increased demand in a market where both available land and construction capacity are limited.
As demand for luxury properties grows, developers naturally prioritise projects offering higher returns, he explained.
This shift also contributes to higher construction costs, leaving fewer resources and less capacity for homes intended for middle-income families.
The result is a housing market in which substantial construction activity can coexist with an inadequate supply of properties affordable to local residents.
Unused properties further restrict housing supply
The European Commission estimates that Cyprus faces a shortage of approximately 39,000 homes, despite significant construction investment and a high proportion of underused housing.
Clerides identified the failure to utilise existing properties and residential land as another major obstacle to improving supply.
Many homes and building plots remain unused because their owners have no immediate need to develop them and face no financial cost for leaving them idle, he explained.
This reduces the number of properties available to buyers and tenants, adding further pressure to an already constrained market.
Rising prices benefit property owners, not buyers
Clerides also discussed research he co-authored for the International Monetary Fund examining the effects of citizenship- and residence-by-investment programmes.
He said there was evidence that such schemes had contributed to rising property prices, creating significant differences in who benefits from investment-led growth.
Higher property values favour landowners but disadvantage people seeking to buy or rent a home, he explained.
These distributional effects should be taken seriously when governments design investment policies, particularly when the wider economic benefits are uncertain.
According to Clerides, the value of foreign investment depends largely on the type of economic activity it generates.
Investment directed solely towards residential property offers relatively limited benefits, whereas projects creating high-quality jobs, expanding productive capacity and introducing new technologies and modern business practices contribute more substantially to the economy.
Headquartering offers benefits but creates pressure
Clerides described Cyprus’s policy of attracting foreign companies to establish headquarters on the island as considerably more beneficial than granting citizenship in exchange for property purchases.
Unlike investment schemes focused mainly on real estate, headquartering can bring businesses, employees and sustained economic activity into the country.
However, he cautioned that even beneficial investment policies must be implemented within reasonable limits.
Cyprus cannot absorb an unlimited number of investments and new residents without consequences for housing availability, infrastructure and the wider economy, he argued.
He therefore called for a more targeted approach to attracting companies, prioritising investments with the greatest economic benefits and the fewest negative consequences.
Reducing external demand must be part of the solution
Although housing policies can help ease affordability pressures, Clerides warned that increasing supply alone may not be sufficient to resolve the Cyprus housing crisis.
When demand rises as sharply as it has in Cyprus, the construction sector can struggle to respond regardless of the measures introduced to encourage development.
He argued that the government must therefore consider policies addressing demand alongside efforts to expand the supply of affordable homes.
“Part of the response to the housing crisis must also be limiting external demand,” Clerides said.
His assessment highlights the challenge facing policymakers: attracting productive foreign investment while ensuring that economic growth does not make housing increasingly unaffordable for the country’s residents.
Also Read: Cyprus to sign Kronos gas field development contracts
For more videos and updates, check out our YouTube channel
