Greece’s house prices on cusp of rising, as its economy begins to recover
March 25, 2017
In Greece’s urban areas, house prices dropped by just 0.46% during 2016, the lowest annual fall in house prices since 2009, according to the Bank of Greece. When adjusted for inflation, house prices actually rose slightly, by 0.03%.
This improvement was also seen in the major cities:
- In Athens, the average price of apartments fell slightly by 0.35% (but increased by 0.15% in real terms) during 2016, after declines of 4.99% in 2015, 6.8% in 2014, 11.45% in 2013, 12.91% in 2012, and 8% in 2011, according to the Bank of Greece.
- In Thessaloniki, the country’s second largest city, house prices fell by 0.5% (i.e., were unchanged when adjusted for inflation) in 2016.
- In other cities (excluding Athens and Thessaloniki), there was a slight house price drop of 0.6% (-0.1% in real terms) in 2016, sharply down from a y-o-y decline of 5% in 2015 and the lowest annual decline since 2008.
Greek residential property prices have fallen by 42% (-45.2% in real terms) from the peak year of 2008.
Despite the slight improvement, activity remains amazingly depressed. The number of housing transactions in Greece has fallen by 72% since 2008, according to a PwC report released in October 2016.
Residential construction continues to fall, with building permits falling 6.9%to only around 12,500 units in 2016, a striking contrast to the 70,000 to 80,000 permits issued annually from in 2004 to 2007. In Athens, building permits dropped 1.4% in 2016 from a year earlier.
Greek house prices are expected to increase by a meagre 0.6% every year from now on, according to PwC. “The Greek real estate market will recover at a slower pace than the Greek economy unless policies to boost demand and reduce oversupply are implemented,” according to PwC.
To revive the housing market, the Greek government recently offered residence to non-EU investors purchasing or renting property worth over €250,000. The residence plan is similar to measures adopted by Hungary, Spain and Portugal. The plan is valid for five years and is open to renewal.
However, the very high property taxes in Greece continue to discourage demand. In fact, property taxes have increased seven times since the global financial crisis. In 2016, Greeks paid a total of €3.5 billion in property taxes, up from €3 billion in 2014 and from just €500 million in 2009.
The Greek economy grew by around 0.3% in 2016, according to the European Commission – an upward revision from its earlier estimate of a 0.3% contraction.After a short-lived recovery in 2014, Greece’s economy returned to recession in 2015, with GDP contracting by 0.2%, amidst the imposition of capital controls and the shutting down of most of its banks. Before this, the country’s real GDP had contracted by 3.2% in 2013, 7.3% in 2012, 9.1% in 2011, 5.5% in 2010, 4.3% in 2009 and 0.3% in 2008, according to the IMF. The economy is expected to grow by 2.7% this year and by another 3.1% in 2018.
Tracking the decline
Once upon a time Greece was a happy country. Real estate agents reported 30% to 40% annual price rises for properties near the sea in 2004. In Athens, house prices rose 11.2% in 2006, before slowing to 6.2% in 2007.
But then the crisis hit, and residential property prices began falling. Here are prices in Athens:
- In 2008, house prices in Athens fell by 0.77% (-3.59% in real terms)
- In 2009, house prices fell by 4.21% (-5.99% in real terms)
- In 2010, house prices fell by 5.83% (-10.45% in real terms)
- In 2011, house prices fell by 7.97% (-10.43% in real terms)
- In 2012, house prices plunged by 12.94% (-13.92% in real terms)
- In 2013, house prices plunged by 11.45% (-9.48% in real terms)
- In 2014, house prices fell by 6.8% (-5.05% in real terms)
- In 2015, house prices fell by 4.99% (-4.43% in real terms).
Mountain of debt, mounting misery
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 fix 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 never been 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 €224.2 billion in 2006, to €319.2 billion in 2013, a 42.4% increase. The national debt declined slightly to €311.5 billion in 2015, from €319.7 billion in 2014, according to the IMF. However, in 2016, the government’s debt increased again to 321.8 billion. In terms of percentage share of GDP, national debt went up from 103.6% of GDP in 2006, to 159.6% of GDP in 2012, and finally to 183.4% of GDP in 2016.
The price of irresponsible spending
When it became 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 resistance, manifested in public protests and rioting.
Seeking a fresh mandate, 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, who then became prime minister. But after assuming office in October 2009, Papandreou revealed that the deficit was much higher than the previous government had claimed. He vowed to downsize 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. These moves lead to a 4% economic contraction in 2010.
Violent protests, rallies, and strikes followed.
The EU offered another bailout loan worth €130 billion in February 2012, saving the country from leaving the Euro. The bailout loan, however, included as condition that Greece should approve a further austerity package.
The continued demand for cuts and more cuts in the face of already-high levels of public misery led to the rise of the radical leftist party Syriza, a coalition of diverse elements. Its leader, Alexis Tsipras, led Syriza to victory when the government’s majority collapsed. Syriza assumed office on January 26, 2015. The new anti-austerity coalition vowed to renegotiate the EU-IMF bailouts arguing that austerity had even helped to devastate the economy which makes it harder for Greece to reduce its mounting debt.
Despite Tsipras having earlier pledged “No more bailouts, no more submission, no more blackmailing," Greece and its creditors agreed a third bailout worth €86 billion in August 2015, imposing further spending cuts. As part of the deal, the government passed a pension and tax reform bill in May 2016, which aimed to raise taxes and increase social security and pension contributions for most Greeks to bring about €5.4 billion in budget savings.
The country hopes for another comprehensive deal by April 2017, including agreement with lenders on labour and energy reforms, fiscal issues, and medium-term debt restructuring.
“In my view there was significant progress… It is perfectly feasible to have a comprehensive deal covering medium-term measures on debt by April,” said Tsipras.
However many economists are more pessimistic. The IMF has repeatedly said that Greece cannot conceivably repay its debts. Most economists believe the establishment of the euro was a mistake, but there is no consensus as to what is to be done. Meanwhile the pressure on Greece continues without a break.
Mortgage market continues to shrink
The mortgage market was 34.9% of GDP by end-2016, down from 38.3% of GDP in 2015 and the lowest level since 2009. Outstanding housing loans are down by more than 23% from the peak in 2010.
New housing loans fell to just €478 million in 2016, from €6.6 billion in 2010 and from €15.4 billion in 2006 - i.e., the new loans market has virtually collapsed.
Many house-owners cannot repay. Greek banks hold about €108 billion in bad loans, just under half of all loans given out. Of these, around 41% are delinquent mortgages.
The percentage of non-performing housing loans increased to 32.1% in 2016, from 31.6% in 2015, 28.6% in 2014, and 10% in 2010, according to the Bank of Greece.
Since the global financial crisis, cash-basis property transactions have accounted for about 80% of all transactions with only 20% relying on bank loans, according to the Bank of Greece.
The “Katselis Law”, enacted in 2010, froze foreclosures on houses with outstanding mortgage debt worth up to €200,000where a family’s annual income was lower than €35,000. These homeowners should also pay at least 10% of their net monthly income towards their mortgage.
The law expired at the end of 2014 but the government continues to provide protection for primary residences, especially to families with incomes below the poverty line. In 2016, about 10,500 homes were transferred to the state as seizures, voluntary transfers, or disclaimers of inheritance, according to Alpha Residential Properties. However, the government recently indicated that it plans to suspend foreclosure procedures of primary residences for debts to the state until end-2017.
Mortgage interest rates are low
For new housing loans:
- Average mortgage rates for new loans with initial rate fixation (IRF) of up to one year stood at 2.57% in January 2017, slightly up from 2.35% in January 2015 but far lower than the interest rate of 4.61% in January 2008.
- Average mortgage rates for loans with IRF of between 1 and 5 years declined to 2.73% in January 2017, down from 4.71% in January 2015 and 4.14% in January 2008.
- Average mortgage rates for loans with IRF of between 5 and 10 years stood at 4.35% in January 2017, down from 5.23% in January 2008.
There are no interest rate figures for loans with longer IRFs, which implies that lending for these types of loans have ground to a halt.
For outstanding housing loans:
- Average mortgage rates for loans with IRF of between 1 and 5 years stood at 3.76% in January 2017, slightly up from 3.62% in January 2016 but down from 5.49% in January 2008.
- Average mortgage rates for loans with IRF of over 5 years declined to 2.38% in January 2017, down from 2.79% in January 2016 and 5.06% in January 2008.
The Greek housing market is vulnerable to interest rate movements as the majority of housing loans have an IRF of up to one year only. Since the second half of 2009, 70% or more of new housing loans have had interest rates adjustable at least annually.
Rental yields remain poor; rents falling
Gross rental yields in Greece remain poor, despite falling residential property prices.
Gross rental yields on 120 sq. m. central Athens apartments are at about 4.1%, slightly up from 3.8% a year earlier, according to Global Property Guide research of July 2016. This is rather a moderate yield. Larger apartments yield less, at about 3.5%. It would be difficult to justify becoming a landlord at yields at this level.
Apartments within the suburbs of Athens have comparably low yields ranging from 3.75% to 4.16%. Likewise, houses in the suburbs have very low yields ranging from 3.08% to 3.39%.
In Crete, gross rental yields of apartments are around 3%. As in Athens, smaller apartments tend to earn higher yields.
Residential rents continue to fall, albeit at a slower pace. In 2016, the central bank’s rent index for dwellings dropped 2.6% from a year earlier, after annual declines of 4.4% in 2015, 7.7% in 2014, 6.8% in 2013, and 2.1% in 2012, according to the Bank of Greece.
In Athens, monthly rents per sq. m. range from around €7 to €10.5 per sq. m., according to Global Property Guide. In Crete, monthly rents per sq. m. of apartments range from around €4 to €6 per sq. m.
Around three fourths of the Greeks are homeowners. The homeownership rate in Greece was relatively high at 75.9% in 2012, according to the European Mortgage Federation (EMF). 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 amongst 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.
Low construction activity
Construction activity in Greece peaked in 2005, a year after the Athens Olympics. Almost 200,000 dwellings were completed in 2005. By 2013, the number of dwellings completed had fallen 94% to 11,748 units - and the numbers continue to fall.
Building permits tell the same story In 2016, the number of building permits in Greece dropped 6.9% y-o-y to just around 12,500 units, after annual declines of 0.9% in 2015, 18.1% in 2014, and 27.7% in 2013. In fact, this was a striking contrast from the 70,000 to 80,000 permits issued annually from in 2004 to 2007. In Athens, building permits dropped 1.4% in 2016 from a year earlier.
Despite these massive declines, there remains an "excess" of housing supply, judging by the large stock of unsold property. According to some property market analysts, the number of dwellings available for sale is hard to estimate, but may have gone beyond 200,000 units due to homeowners and construction companies seeking liquidity and wishing reduce their tax burden.
According to the European Mortgage Federation (EMF), the excess in supply is attributed to the considerable drop in demand due to “a surge in unemployment, a fall in households’ disposable income, real estate tax hikes and an unstable – at least until recently – tax regime, coupled with liquidity shortage against the backdrop of banks’ tightened credit standards”.
Because of oversupply, investments in the housing market is expected to remain in low levels, particularly at €4.5 billion every year, according to the PwC.
Greek economy is now improving
The Greek economy grew by around 0.3% in 2016, according to the European Commission – an upward revision from its earlier estimate of a 0.3% contraction.The recovery is expected to continue this year with a projected real GDP growth rate of 2.7%, mainly due to an upsurge in tourism.
The economy is expected to grow further by 3.1% in 2018.
“We are at a turning point at which we can say, with certainty, that we are leaving the recession behind us,” says national economy minister Giorgos Stathakis.
After a short-lived recovery in 2014, Greece’s economy returned to recession in 2015, with GDP contracting by 0.2%, amidst the imposition of capital controls and the shutting down of most of its banks. Before this, the country’s real GDP had contracted by 3.2% in 2013, 7.3% in 2012, 9.1% in 2011, 5.5% in 2010, 4.3% in 2009 and 0.3% in 2008, according to the IMF.
The budget deficit fell sharply to 1.1% of GDP in 2016, from 7.5% of GDP a year earlier, according to the European Commission. Greece is expected to have a 1.1% of GDP deficit this year, before finally achieving a budget surplus of 0.7% next year.
The national debt was 183.4% of GDP in 2016, from 159.6% of GDP in 2012 and 103.6% of GDP in 2006, according to the IMF.However, the country’s debt is expected to fall to 170.6% of GDP in 2018, according to the European Commission.
The nationwide unemployment rate stood at 23.4% in 2016, slightly down from 25% in 2015 but still far higher than the average of just 9.6% between 2001 and 2009. The jobless rate is expected to remain above 20% during the next two years.
Consumer prices in Greece are also rising gradually. Nationwide headline inflation stood at 1.3% in February 2017, up from 1.2% in the previous month and the highest rate since February 2012, according to the Hellenic Statistical Authority.