Title Deeds and the Financial Crisis

The British parliament raised the issue with the Cypriot authorities’ inability to protect the property rights of UK citizens who had invested in Cyprus properties back in 2007. To their astonishment, these buyers found out that they would get no title deed even though they bought the property through a law office (something that in their country implies that you automatically get a title deed). In 2007 Cyprus, no-one involved in the rapidly developing and already large property sector (banks, developers, chartered surveyors, land registry, town planning and municipal authorities, lawyers, accountants, politicians etc.) was alarmed, despite the developing dangers for an economy trying to sell properties. In my opinion, ultimate responsibility for failing to tackle this problem must lie with the government agencies that have the primary responsibility of protecting property rights. One basic principle for an economy to function well is the protection of a citizen’s property rights. In this case, the property right is protected with the issue of a title deed. My fundamental position is that no immovable property should change hands without a title deed. With this tough measure in place (which would have forced authorities to ditch bureaucratic procedures because of the large economic cost from failing to do so), subsequent systemic problems would have been largely avoided. First, in the absence of title deeds, reselling a property is difficult, therefore increasing the possibility for an unrestrained increase of immovable property prices. When reselling becomes very difficult, the property market is not allowed to function properly. Not only do prices rise too fast in the good times but in the bad times dangers rise disproportionately due to property illiquidity in a leveraged economy. Second, in the absence of a central credit register, it is more likely for credit from the banking sector to increase very fastin the good times without the central bank having the necessary tools to control credit expansion. Third, the state loses substantial revenue from transfer fees and subsequent property taxes. The solution to this Gordian Knot is simple, and a state respecting its citizens would not have waited for the imposition of a solution by the Troika. No property transaction without a title deed should be legal and there should be a central credit registry. The financial crisis would have been much more manageable were these simple instructions from the Troika put in place back in 2007. Inability to quickly apply similar changes to the “business as usual”model will bring the next economic crisis to Cyprus sooner than many people think. Alexandros Michaelides is a professor of finance at Imperial College Business School.