House prices in Greece continue to fall.  The economy is going through one of its worst crises in history.

The average price of apartments in Greece fell 4.3% y-o-y to Q3 2010, according to the Bank of Greece. Over the same period, in Athens average prices fell 3.1%.  In Thessaloniki (the second largest city) prices fell 9.7%, 5.9% in “all other cities”, and 2.7% in “all other areas”. New apartments (up to 5 years) suffered steeper price falls than old apartments (5 years or older), -5.2% versus -3.7%.

Residential real estate transactions also fell, in number, volume, and value, in Athens by 15.4% in the first nine months of 2010, compared to a year earlier. For Greece as a whole, transfers were down 6.2%, according to the Hellenic National Cadastre. 

Tax increases, spending cuts, privatization and other crucial economic reforms are part of the conditions of the €110 billion EU-IMF bailout loan approved in May 2010.  Other reforms include strengthening laws against rampant tax evasion, liberalizing the labour market and selling state assets. The sale of 6,000 Greek islands, reported by The Guardian (and alas, quoted by this site) was not part of the privatization program.

Instead, the government hopes to raise €7 billion over the next three years from the sale of airports, railways, utilities (gas and postal services), and commercial real estate. The government is confident about meeting targets, to ensure the release of a €15 billion loan tranche in March 2011.

Greece’s 2010 fiscal deficit was 9.4% of GDP, down from 13.6% in 2009. A further reduction to 7.4% of GDP in 2011 is expected, still far from the EU maximum of 3% of GDP which must be reached by 2012. The national debt is expected to continue climbing to 152.6% of GDP in 2011, from 142.5% in 2010 and 126.8% in 2009.   It’s far from over.

Grinding to a halt

Greece’s housing market ground to a halt in 2007 and 2008 due to the global credit crunch and recession.

After registering strong annual price increases of averaging 13% in 2005 and 2006, dwellings prices in “Other Urban” areas rose by a mere 3.8% in 2007 and 2.6% in 2008. In 2009, the average price dropped by around 1.8%.

In Athens, house price rose 8.7% in 2005 and 11.2% in 2006. Price growth slowed down to 6.2 in 2007 and barely moved (0.9%) in 2008. In 2009, Athens prices fell by 4.6% y-o-y on the average.

Strong growth in property prices were experienced in Greece after the 2004 Athens Olympics. There was an increase in demand for second-homes and holiday villas in Greece’s southernmost and biggest island, Crete. Northern Europeans love the long, hot summers and wonderful beaches. Also popular among tourists are the ruins of the ancient Minoan civilization.

Sharp price increases had been observed in Crete. Real estate agents reported 30% to 40% annual price rises in the past for properties near the sea. The boom was also facilitated by improvements in local infrastructure and building quality.

Similar to Spain, the house price boom in Greece ended because of the global crisis. Financing for house purchases of foreigners dried up with the credit crunch due to the global financial meltdown. Economic recession in UK, Germany and other countries also forced homeowners to sell their properties; this led to a huge oversupply that dampened house prices. 

Mountain of debt and deficit

Greece’s debt problem is deeply rooted and, unfortunately, there is no easy way out. When the euro was first introduced in 1999, Greece was left out because of its high budget deficit and inflation. Embarrassed by the isolation, Greece appeared to clean up its act and fixed its finances and macroeconomic fundamentals. By January 2001, it was able to adopt the euro as official currency.

In November 2004, however, Greece admitted that it had fudged its figures to gain entry into the Eurozone. Its budget deficit had not been never within the EU limit of 3% of GDP since 1999. It was also revealed in early 2010 that Greece had paid Goldman Sachs and other banks to hide the true amount of its debt and borrowing.

Euro adoption by Greece led to a cycle of debt-financed growth and deficit-spending. Access to cheap funds allowed it to continually pump-prime the economy, leading to higher growth.

With higher growth, government officials found it right to reward themselves with higher incomes and pensions and generous leave credits and bonuses. The bureaucracy is also bloated and overstaffed.

The increase in spending pushed the national debt from €141 billion in 2000, to €273.4 billion in 2009, a massive 94% increase, or from 103.7% of GDP in 2001 to 115% of GDP in 2009. The national debt is expected to rise to 125% in 2010, the highest in the EU.

Political and economic costs

When it was clear that the spending spree was unsustainable, creditors and the EU together with other international institutions such as the IMF demanded that Greece cut its spending, including wages and pensions. This was met with severe public resistance, manifested in public protests and rioting.

One of the biggest casualties of the crisis was the ruling government. Seeking a fresh mandate to deal with the crisis, the New Democracy Party called for a snap election, two years earlier than required, and was soundly defeated by the Pan-Hellenic Socialist Movement (PASOK) headed by George Papandreou, now the prime minister.

After assuming office in October 2009, Papandreou revealed that the deficit was much higher than the previous government had claimed. His response to the crisis included austerity measures: spending cuts and tax increases. He also vowed to reduce the public sector and fight rampant tax evasion.

In May 2010, European leaders and the International Monetary Fund (IMF) agreed to a three-year, €110 billion bailout for Greece which was tied to additional austerity measures through cuts in the public spending (civil servants´ salaries, freezing pensions, raising the retirement age) and hikes in taxes and fuel duty. The general sales tax was raised from 19% to 21%. These moves are expected to lead to a 4% economic contraction in 2010.

However, the crisis persists because of the adverse public reaction to the austerity measures and the perception that the government’s moves are insufficient. The deficit is expected to remain at around 8% of GDP in 2010 and 2011.

Frozen mortgage market

Outstanding housing loans grew by an average of 30% annually from 2001 to 2007; rising from €11.3 billion in 2000 to €69.4 billion in 2007. As percentage of GDP, the mortgage market expanded from 8.3% of GDP in 2000, to 30.3% of GDP in 2007.

The credit crunch slowed down the expansion of the mortgage market to 4% in 2009. By the end of 2009, outstanding housing loans reached €80.56 billion, around 34% of GDP. There was a significant decline in the volume of new housing loans, from €15.4 billion in 2006, to €8 billion in 2009.

The Greek crisis froze the already weak mortgage market. Outstanding housing loans dropped from €81. 173 billion in March to €81. 125 billion in April 2010. It was the first time housing loan volume dropped since mortgage data was collected.  In May, the decline continued to €81. 11 billion.

Mortgage rates in Greece are also inching up even if ECB’s key rate remain unchanged at 1% since May 2009. The mortgage rate for loans with initial rate fixation (IRF) of up to one year rose to 3.36% in May 2010 from 3.05% in January. For loans with IRF between 1 and 5 years, the average mortgage rate moved from 4.6% in January to 4.84% in April before sliding to 4.73% in May 2010.

The housing market remain vulnerable to interest rate movements, majority of housing loans in Greece have IRF of up to one year only. Since 2H 2009, 70% or more of new housing loans have interest rates that are adjusted annually at the minimum.

Low yields

Rapid residential property price increases in the past, minimal real rental increases and the popularity of owner-occupancy led to low rental yields in Greece. In August 2009, rental yields for apartments in central Athens range from 2.5% to 2.7%. Properties within the suburbs of Athens earn slightly higher yields, 3% - 3.8% for apartments and 2.7% - 3.4% for houses.

For villas in Crete, rental yields range from 3.4% to 4.9%. Smaller properties tend to earn higher yields.

Homeownership rate in Greece was relatively high at 74% in 2004. The rental market comprised 20% of the dwelling stock in 2004, down from 24% in 1991.

Rapid urbanization has led to a sharp dichotomy between urban and rural areas. A report in 2001 revealed that around 34% of the housing stock is vacant, mostly in rural areas. These units are typically dilapidated, or in need of total rehabilitation.

On the other hand, dwellings units in urban areas are among the most crowded in Europe. Most children continue to live with their parents after they enter adulthood. The reduction of notary fees from 1.2% to 1% of the real estate’s value was clearly insufficient in reducing the high transaction cost, which adds to the burdens of first-time homebuyers.

Oversupply and overhang

It is quite unusual that construction activity in Greece peaked in 2005, a year after the Athens Olympics. Almost 200,000 dwellings were completed in 2005, significantly higher compared to the 120,000 completions in 2003 and 2004. Since 2005, however, dwellings completed dropped drastically, down to 61,490 units in 2009.

Building permits also dropped significantly. From 2004 to 2007, local governments issued around 70,000 to 80,000 residential building permits annually. The number of building permits dropped to 65,474 in 2008 and to 56,205 in 2009.

The drop in building permits continued in Q1 2010. Only 12,690 permits were issued from January to March 2010, 2.8% lower compared to the same period in 2009.

Despite the drop in completions, a huge amount of housing units remain unsold. An article by the Wall Street Journal estimates the overhang at about 250,000 new homes in 2009. Greek construction firms expect the continued drop in construction activity until 2011.

Recession has just begun

While other countries in Europe started to register recoveries in 2009, Greece’s recession only started that year. The economy contracted by around 2% and is expected to contract further by around 4% in 2010.

Average annual GDP growth from 2000 to 2007 was 4.2%, among the highest in the EU and OECD. Economic growth slowed down to 2% in 2008.

The average wage dropped for the first time in 35 years in 2010 as a result of the cutbacks and anticipated private sector increases just below inflation. Nominal wages are expected to be reduced by 0.9% and 3.8 percent in real terms, according to the Bank of Greece. This wage cuts are clearly insufficient to offset the excessive increases of the past.

The unemployment rate is also expected to rise to 12% by the end of 2010 and13% in 2011, from 9.4% in 2009. This offsets gains in the past when the rate was successfully reduced from 10.5% in 2004 to 7.65% in 2008.

Tourism, which accounts for almost one fifth of the Greek economy and was seen as the best hope for economic recovery, was badly hit by recurring images of rioting protesters, burning buildings and debilitating strikes.