Greece’s house prices on cusp of rising, as its economy continues to recover
February 12, 2018
The Greek economy was estimated to have grown by 1.6% last year and is expected to grow by another 2.5% this year, amidst a tourism upsurge. And after seven years of falling house prices, things are turning around.
In Greece’s urban areas, house prices dropped by just 0.67% during the year to Q3 2017, the lowest annual fall in house prices since Q1 2009, according to the Bank of Greece. When adjusted for inflation, house prices declined by 1.62%. During the latest quarter, house prices in urban areas fell slightly by 0.06% but actually increased 1.18% when adjusted for inflation.
This improvement was also seen in the major cities:
- In Athens, the average price of apartments fell slightly by 0.44% (-1.39% in real terms) during the year to Q3 2017, the lowest y-o-y decline since Q2. Quarter-on-quarter, prices increased 0.1% (1.34% in real terms).
- In Thessaloniki, the country’s second largest city, there was a slight house price drop of 0.7% (-1.7% in real terms) y-o-y in Q3 2017, an improvement from last year’s 2.1% annual fall and the lowest decline since Q1 2009. Quarter-on-quarter, prices fell by 0.2% (increased 1% in real terms) in Q3 2017.
- In other cities (excluding Athens and Thessaloniki), house prices fell by 1% (-2% in real terms) during the year to Q3 2017, an improvement from y-o-y declines of 2% in the previous quarter and 1.8% a year earlier. In a quarterly basis, prices increased 0.1% (1.3% in real terms) in Q3 2017.
Greek residential property prices have fallen by 42.8% (-45.9% in real terms) from the peak year of 2008.
Property transactions and construction activity are both rising again, but are still far below their peak levels. During the first three quarters of 2017, the number of residential property transfers recorded at the Athens land registry rose by 16.2% from a year earlier.
During the first ten months of 2017, the total number of permits rose by 10% to 11,205 units from the same period last year, according to Hellenic Statistical Authority. But it remains far below the 70,000 to 80,000 permits issued annually from in 2004 to 2007.
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, high property taxes in Greece continue to discourage demand. In fact, property taxes have increased seven times since the global financial crisis. For September 2017 to January 2018 alone, about 6.3 million owners are required to pay €3.15 billion in property tax (ENFIA), up from €3 billion in 2014 and from just €500 million in 2009. Rental taxes have also increased. For the first €12,000 of annual rent revenues the tax is 15%, up from 11% until 2015. For rent revenues between €12,000 and €35,000 per year the rate soars to 35%.
The Greek economy grew by around 1.6% in 2017, according to the European Commission – in contrast with last year’s 0.2% 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 International Monetary Fund (IMF). The recovery is expected to continue this year with a projected real GDP growth rate of 2.5%.
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)
- In 2016, the housing market showed signs of improvement, with house prices in the capital city falling by just 0.79% (-0.29% in real terms.
The great Greek debt crisis
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 was 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 €315.1 billion in 2015, from €322 billion in 2014, according to the IMF. However, the government’s debt increased again to €319.4 billion in 2016 and to €326.4 billion in 2017. 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 181.6% of GDP in 2016. The national debt declined slightly to 180.2% of GDP in 2017 and is expected to fall further to 177.8% of GDP this year.
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.
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.
While things are improving, the future of Greece remains uncertain, especially as the bailout program expires in August this year. With national debt of more than 180% of GDP, IMF has repeatedly said that Greece cannot conceivably repay its debts. As such, Greece is now discussing a possible debt relief with its official lenders and proposes to link the level of debt restructuring to economic performance.
“Things are looking better for Greece, having regained access to markets and with the recovery gathering speed,” said economist Fabio Balboni of HSBC Bank Plc. “In 2018, the country might finally exit its bailout program, but a clean exit might prove challenging if the Eurozone fails to deliver substantial and credible debt relief.”
Mortgage market continues to shrink
The mortgage market was 32.4% of GDP in 2017, down from 34.8% in 2016 and 38.4% in 2015 and the lowest level since 2009. Outstanding housing loans fell by 4.2% to €58.62 billion in 2017 from a year earlier, according to Bank of Greece. Outstanding housing loans are down by more than 26% from the peak in 2010.
- Up to 1 year: €820 million, down 0.5% from a year earlier
- 1-5 years: €1.12 billion, down 9.7% from a year earlier
- Over 5 years: €56,51 billion, down 4.2% from a year ago
Though new housing loans rose by 7.1% y-o-y to €453 million during the first eleven months of 2017, it is still very far 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 33.5% in Q3 2017, from 32.4% in 2016, 31.8% 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 €200,000 where 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 in January 2018, the government announced that it is already suspending the debtor protection and will allow debt management firms to go after the residences of defaulters and devious debtors.
Mortgage interest rates remain low
For new housing loans, the average interest rate with initial rate fixation (IRF) of up to one year stood at 2.67% in November 2017, slightly up from 2.62% in November 2016 but far lower than the interest rate of 5.35% in November 2008.
There are no interest rate figures for loans with longer IRFs, which implies that lending for these types of loans might have ground to a halt.
For outstanding housing loans:
- Average mortgage rates for loans with IRF of between 1 and 5 years stood at 3.99% in November 2017, slightly up from 3.64% in November 2016 but down from 5.36% in November 2008.
- Average mortgage rates for loans with IRF of over 5 years declined to 2.35% in November 2017, down from 2.61% in November 2016 and 5.08% in November 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.
Moderate rental yields; falling rents
In the centre of Athens gross rental yields on apartments are moderate, at around 4.2% for apartments of 120 square metres (sq. m), but proportionately more for smaller apartments, according to Global Property Guide research of July 2017.
The gross rental yield for apartments located in suburbs of Athens is slightly higher, at about 4.4%. On the other hand, houses in the suburbs have very low yields ranging from 2.6% to 3.2%.
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 2017, the central bank’s rent index for dwellings dropped 1.9% from a year earlier, after annual declines of 2.6% in 2016, 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 €7.5 to €10 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 remains relatively high at 75.1% in 2016, according to European Mortgage Federation (EMF). The rental market comprised about 20% of the dwelling stock.
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.
Construction activity rising again
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, dropping 5.3% in 2016 just 12,641 units, after annual declines of 0.6% in 2015, 18.2% in 2014, and 28.1% in 2013 - a striking contrast from the 70,000 to 80,000 permits issued annually from in 2004 to 2007.
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”.
Surprisingly, construction activity is rising again. During the first ten months of 2017:
- Number of permits: 11,205 units, up 10% from a year earlier
- Floor space: 2.29 million sq. m., up 21.4% from a year earlier
- Volume: 10.14 million cu. m., up 23.5% from a year ago
Greek economy continues to recover
The Greek economy grew by around 1.6% in 2017, according to the European Commission – in contrast with last year’s 0.2% contraction. The recovery is expected to continue this year with a projected real GDP growth rate of 2.5%, mainly due to an upsurge in tourism.
The economy is expected to grow further by another 2.5% in 2019.
“The prospects of the Greek economy over the next months are overall good for several reasons. First of all economy starts from a low base, then there are some reforms that have been having a positive impact, but primarily there is political stability,” said Nikos Vettas of Athens-based think tank Foundation for Economic and Industrial Research (IOBE).
“There is not much controversy to the EU partners, Greece is also benefitting from the external environment which has been positive,” Vettas added.
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.
Greece saw a budget deficit of 1.2% of GDP in 2017, in contrast to a surplus of 0.5% of GDP in 2016, according to the European Commission. The country is, however, expected to return to a budget surplus this year, equivalent to 0.9% of GDP.
The national debt was 180.2% of GDP in 2017, 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 177.8% of GDP this year and to 170.1% of GDP in 2019, according to the European Commission.
The seasonally-adjusted unemployment rate stood at 20.7% in October 2017, down from 23.3% in the same period last year but still far higher than the average of just 9.6% between 2001 and 2009. The jobless rate is expected to remain above 20% this year.
Consumer prices in Greece are also rising gradually. Nationwide headline inflation stood at 0.7% in 2017, up from zero inflation in 2016, -0.2% in 2015, -2.6% in 2014, and -1.7% in 2013, according to the Hellenic Statistical Authority.