An obvious slowdown of house prices

House prices are still rising in Greece, but there’s been an obvious slowdown. Prices barely rose during the third quarter of 2007, and the year-on-year increase in prices to third quarter was 2.31% compared to 2004’s 4.69%. In 2006, urban residential property prices rose by 11.99%, albeit lower than 2005’s 14.95% increase. House prices have been rising in earnest for more than a decade, rising by 214% from 1993 to 2006.

These figures are for ‘other urban areas’ – bizarely, no official house price statistics are now reported by the Bank of Greece for Athens. In fact, Athens house prices appear to be slowing earlier than the rest of Greece.

The rise in house values has produced a substantial wealth effect for homeowners, as housing is the single biggest component of household wealth, comprising 80% to 90% of total household wealth, according to the National Bank of Greece. Homeownership rate is high at 80% of all households.

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

Cradle of Civilization

There is also remarkable demand for real estate 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.

Prices in Crete are still low compared to more popular sites in Southern Europe such as Spain, France and Italy. Holiday homes and villas are sold at around €900 to €1,500 per sq. m. This is much lower than the prices of coastal Spanish properties, at €2,500 to €3,000 per sq. m., according to Global Property Guide figures.

Even properties in Athens are relatively inexpensive. City-centre condominiums are priced at around €1,400 to €1,850 per sq. m.

Strong GDP growth

Average annual GDP growth from 1995 to 2006 was 3.78%, among the highest in the EU and OECD. The economy grew by 3.8% in 2007 and is expected to weaken in 2008 before edging up to around 4% in 2009.

Greece has not for a single year since the introduction of the common currency had an inflation rate which falls within the ECBs much vaunted 2% target. The 3.8% rate of inflation in 2007 is still stubbornly around 1.43bps above the 2% target. The rate of inflation has gradually started to come down from 2006’s 3.6% due to monetary tightening of the Bank of Greece. However, in 2008 inflation is likely to rise.

From 1995 to 2006, real wages were rising by an average of 6.97% annually. Real wage growth in 2007 was 5.86%.

Changing age structure

An interesting development in the components of Greek GDP in recent years has been the contrasting behavior of domestic consumption and exports. Exports rose by 30.08% between 2004 and 2007, compared to only a 13.31% increase in domestic consumption.

This can partly be attributed to the population’s changing age structure. Greece is now at the mature demographic phase. Life expectancy at birth is over 80, and median ages are moving up steadily through the 40 to 50 range.

As the age structure changes, economic activity also changes. With domestic consumption steadily falling, the Greek economy is starting to depend increasingly on exports to achieve economic growth, as in the case of Germany and Japan. To date it has been very successful, as suggested by its relatively strong GDP growth.

Robust construction activity

Housing and building construction have always played a key role in Greece's industrial sector and have long been a major source of income; accounting for approximately 7.5% of GDP.

Construction activity in Greece has been surprisingly robust. Annual growth in construction output in 2007 increased by 17.7% in third quarter, 15.1% in second quarter and 20.5% in first quarter.

Obviously, Greece has been getting most of its GDP growth from fixed capital formation - simply summed up in just one word - cement.

The government traditionally has seen the construction sector as a way to boost employment, income, and domestic demand. Accordingly, the housing construction industry has historically enjoyed tax advantages. However, with the fiscally conservative policies of the 1990s, increased taxation was considered.

Interest margins widened

Interest rates on housing loans followed an upward trend in 2007 in Greece, following ECB rates. In May 2007, mortgage rates on new loans ranged from 4% to 4.56% while rates for outstanding loans ranged from 4.70% to 5.56%. Higher volatility was evident in 2007 as interest margins widened considerably, which means greater uncertainty and possible decline in loan-to-value ratios.

High transaction costs

Greece has one of the highest roundtrip transaction costs in Southern Europe at 15.5%, according to Global Property Guide research. If the property is new, total costs are even higher because of the 19% VAT imposed in lieu of transfer taxes (7% to 11%).

Property ownership issues tend to dampen demand. The lack of a central land registry, and complicated inheritance laws, lead to spurious and unreliable titles. Several family members are often signatories to titles and deeds.

Non-EU nationals must seek special permits from the Local Council for the acquisition of properties near national borders and in some islands. Foreigners also need a permit to rent out their property.