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REAL ESTATE

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The Cyprus’s Real Estate Market At Full Speed. What Next?

The Cyprus’s Real Estate Market At Full Speed. What Next?

Residential and Commercial real estate are at an all-time full speed in a relentless “development arena” that seems to ignore everything that took place in 2013. It’s a new era in Cyprus’ real estate history, close to surpassing in prices and quantity the 2008 all-times high. 

 

How long can this go on and are we at the peak yet?

 

Certainly, it’s no comfort that some of the most respected investors of all times are predicting rocky times ahead for the world economy. Ray Dalio, for one, seems to be on a march to prove everyone that we are at the precipice of an epic economic meltdown. 

The most dangerous words in investing are “this time it’s really different”. People can’t stop trying to come up with reasons why it is. So is it this time? Well, it’s not impossible. Economists admit that when people say things are different, 20% of the time they are right.

It is hard to put a finger on anything systemic that could cause the next world recession. Instead, something much more sinister is lurking under the surface; the colossal levels of cheap money in the system. All this easy money is looking for a home, being pushed into all asset classes, including real estate, in investors’ desperate search for yield. Markets are melting up, propped by the free money. It is sinister because we don’t control it, nor do we understand it. We don’t have a historical precedent for it.

As a result, corporate debt is cheap, very cheap. Demand for corporate debt is surpassing all expectations again, and companies can fund their growth at near zero rates.

All this does, of course, is to increase the risk of a sudden deep collapse should there be a change in rates, pushing thousands of weak companies into delinquency in what could become a self-feeding downward spiral.

 

But how could this happen?

There is nothing structural that could cause such a reversal. We are all hyper-alert to any signs that the next recession is coming. The 2010-2015 crisis has left us with deep scars, and thanks to its cataclysmic nature, it forced Cypriot regulators and authorities to feel the acute need to prevent and stop any such wrongdoing from appearing in the future  

Nor does the Cyprus economy show any signs of overheating. Yes, it’s been long and vivid, but also the most sophisticated real estate market in Cyprus’s history. There’s nothing that’s really booming that could go bust.  There is absolutely no reason to be concerned about inflation that would force it to start hiking interest rates. Wages simply can’t pick up despite low unemployment levels. Numbers show that jobs are being added, but not with higher wages. Better and newer technology means it now takes fewer people to do the same amount of work, a phenomenon that is increasingly finding its way into higher-skill jobs. There is also the argument that consumers are much clever and more diverse. 

 

Yes, everything seems to be ticking along just nicely.

 

However, a global recession due to political or other factors could shake the market to its core, not so much due to its size, but because of its structural significance. Private investments in the real estate market have been the primary source of gains for developers, lawyers, accountants and institutional investors in the post-crisis years. 

So it’s different this time…but it is not. Crises are certain; they are inevitable like death and taxes because we are all driven by the urge to earn superior return. It is human to chase sensations. Last time it was the subprime mortgages, securities, shares and derivatives that no one fully understood. 

 

Scarred by 2010-2015, people are looking for the next big short; the next Collateralized Debt Obligation that could bring the market down. But there might not be one this time around. All crises are caused by some form of a market bubble; a moment when no price is too high, which eventually leads to a reversal and a downward spiral. 

Cypriot Developers and others have infected the market with a profound belief that they are revolutionizing the real estate market and this time is self-financed, efficient and more internationally positioned than ever before. 

 

However, we should always be cautious in that Banks and Developers, also in Cyprus, are systemic, in that when they perform bad, they drag down the market, not only because of their size (which is significant), but also, because investors may reprice the market, taking the promise of an infinitely more profitable tomorrow out of the equation. 

 

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