22 July 2017 Construction is back! (Or is it?)

The index of production in construction produced by the Statistical Service (Cystat) reported a whopping 36.5% year-on-year increase in the first quarter of 2017.

This followed double-digit growth rates for four out of the five preceding quarters.

Growth is being led by the construction of buildings, where production expanded year on year in the first quarter by 43.4%. Civil engineering projects rose by a still robust but less dramatic 15%.

It is now pretty clear what is behind the latest boom: the ‘cash for passports’ scheme, which is dotting the Limassol skyline with high-rise residential buildings and sending real estate sales rocketing.

Real estate sales rose by 10.1% year on year in the first quarter, after a massive 70.1% in the fourth quarter of 2016 as people rushed to take advantage of the expiry of tax breaks.

Real estate sales have encouraged plans to construct more. Building permits for dwellings rose by 36.6% year on year in the first quarter.
All this has had a positive impact on other parts of the economy.

In the first quarter of 2017 cement sales rose by 36.5%, employment in construction expanded by 5.8% and unemployment in the same sector dropped by 26.2%.

The expansion in construction is probably also behind the €673 million drop in non-performing exposures (NPEs) between December 2016 and March 2017.

With these kinds of numbers, it is no surprise that there is a reluctance to drop the scheme, even though it has prompted some criticism.

I am no expert in these matters but there are those who say that the infrastructure in Limassol for sewerage and transport will be unable to cope with the rapid increase in new building and new residents.

Certainly, having had personal experience being stuck at the big downtown Limassol roundabout at 6pm as everyone is leaving work, I was left with the impression that the transport infrastructure in Limassol leaves something to be desired.

Others believe that the EU will soon put a stop to it, although since citizenship is a national competence, not an EU one, I am not sure there is much the EU can do about it.

Other criticisms are that the boom will lead to overheating. Here, it is not so easy to tell. On the one hand, construction is still well below its peak.

Despite a year of strong growth rates, the index, which is based at 2010=100, had only reached 58.1 by the first quarter. In other words, construction output is still around 40% smaller than it was in 2010.

On the one hand, history suggests that a rapid increase in any sector of the economy leads to a widespread belief that it will never end and therefore to excessive risk-taking.

There are bound to be those who will pay too much for properties of low quality or which they cannot sell once the boom starts to falter.

By Fiona Mullen, Director, Sapienta Economics Ltd