The fluctuations in monetary policy have a direct influence on the broader economy by shaping household spending, saving, and investment habits. This connection was clearly outlined in a recent report by economists from the European Central Bank (ECB), Niccolò Battistini and Johannes Gareis.
The housing market is a vital channel in this dynamic, as mortgage interest rates affect property purchases, which subsequently impact household expenditure on goods and services.
Between 2022 and 2023, the ECB implemented rapid increases in key interest rates to tame inflation pressures. These hikes had a notable effect on housing affordability, typically measured by an index balancing income levels, property prices, and mortgage repayment amounts.
This affordability index has seen considerable swings over the years—from its low point during the 2008 financial crisis, peaking in 2016, and then gradually easing from 2017 onward, with a marked dip throughout 2022.
While affordability has shown gradual improvement since mid-2023, it remains below the levels last seen in 2021.
From the end of 2021 up to 2023, increasing borrowing costs exerted significant pressure on potential homebuyers. This pressure was not fully counterbalanced by wage increases or property price adjustments, resulting in fewer transactions and diminished household spending.
The ECB’s analysis highlights that a 0.25% rise in short-term interest rates can reduce housing sales by approximately 2% and household goods consumption by around 0.3% over a three-year horizon.
This phenomenon, often called the “housing sales channel,” illustrates how shifts in monetary policy can ripple through the economy by altering consumer behavior.
The recent period of 2022-2023 experienced a sharp decline in housing affordability, which translated into a roughly 10% drop in household goods spending and a 0.6 percentage point reduction in overall private consumption.
Starting 2024, stabilized interest rates coupled with rising incomes have fostered a modest recovery that looks set to continue into 2025.
The near-term forecast for Cyprus’ housing market appears cautiously optimistic, driven by improving affordability that supports increased property transactions and enhanced consumer spending.
Nonetheless, ECB experts caution that external risks such as global trade tensions, US tariffs, and geopolitical conflicts could temper this recovery.
Affordability remains a notable challenge in Cyprus, particularly burdening young couples striving for home ownership.
Data from the Central Bank shows mortgage interest rates climbed to 3.97% in June 2025, up from 3.74% in May. For fixed-rate mortgages up to one year, rates hit 3.95% in June, positioning Cyprus as having the fifth highest rates in the eurozone and above the average of 3.61%.
Meanwhile, fixed-rate loans between one and five years slightly eased to 3.09% from 3.16% in May, remaining below the euro area average of 3.41%.
The Housing Price Index (HPI) from the Statistical Service of Cyprus reached 113.71 points in Q1 2025, marking a 2% increase year-on-year. Concurrently, the Central Bank’s Residential Property Price Index reported a 4.8% annual rise: detached homes up 5.6% and apartments up 3.5%.
Despite these gains, Cyprus dropped to 42nd place in the Knight Frank Global House Price Index for Q1 2025. The nominal price increase slowed to 2%, with a real (inflation-adjusted) rise of just 0.4%, continuing the downtrend from a strong 8.5% surge in 2023.
For those searching for affordable houses and villas in Cyprus, or interested in exploring cheap apartments for sale, the current market offers varied opportunities despite these challenges.
As the market stabilizes, keeping an eye on interest rate movements and property price trends will be key for anyone looking to buy in Cyprus in 2025.
For a broader understanding of property types and prices in Cyprus, visit our detailed listings of plots of land for sale or explore our range of villas across the island.
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