Macroeconomic Influences on Cyprus House Prices

Abstract

This paper attempts to explain the determinants of intertemporal variations in housing prices in Cyprus over the period spanning from the first quarter of 2006 until the second quarter of 2014. The analysis focuses on explaining quarterly percentage changes in the House Price Index published by the Central Bank of Cyprus. After estimating several alternative specifications with different combinations of independent variables and different lags we were able to explain about 70% of the quarterly percentage changes in Cyprus house prices. Our findings indicate that nominal GDP per capita, and, alternatively, nominal GDP, have the largest impact on prices followed by construction costs and the number of households. Interest rates were found to have the smallest effect. The results of the study provide also indications of an asymmetric effect of GDP on demand and house prices before and after the Lehman Brothers collapse. We believe that the considerably stronger effect of rising GDP on house prices during the pre-crisis period is attributable to the abundance of both equity and debt capital that was available for house purchases.