Despite the severe debt crisis in Greece, demand still remains high for Greek real estate on the Mediterranean Coast. To raise money the government is offering islands for sale or long-term lease that have never before been available for public ownership. See the following article from Global Property Guide for more on this.
As the Greek economy struggles to get back on track, residential property prices continued to slide in Q1 2010. The situation is so severe that Mediterranean islands, once off-limits to foreign ownership, are now being considered for sale by the government.
The residential property price index for Athens in Q1 2010 was lower by 1.5% q-o-q and 2% y-o-y. In urban areas other than Athens, the price index fell 2.3% q-o-q and 2.6% y-o-y, according to data from the Bank of Greece. After the price indices reached their respective peaks in mid-2008, prices dropped by 6.3% in Athens and 6.7% in other urban areas.
Falling tourism also led to lower prices of apartments, a general term for holiday homes, villas and other tourist-oriented vacation units. The average price of old apartments (5 years old or older) dropped 4% y-o-y and 1.7% q-o-q to Q1 2010. On the other hand, the price of new apartments (less than 5 years old) fell 3.5% q-o-q and 0.3% y-o-y, over the same period.
Problems with Greece’s mounting deficit exacerbated the effects of the global financial crisis. With a deficit of 13.6% of GDP in 2009 and difficulties in raising new funds through the private financial market, Greece’s credit rating was downgraded to junk status in April 2010.
Despite the new €110 billion bailout from the International Monetary Fund and the European Central Bank approved in May, there are still doubts that Greece can get out of the crisis. Cutbacks in wages, pensions and government spending led to massive protests and riots in Athens and other major cities.
As Greece struggles to raise funds, the Guardian reports that the country is now offering around 6,000 of its islands for “sale”. Once off-limits to foreigners and citizens alike, their sale (or long-term lease for joint development with the government) highlights the desperate situation. Despite the crisis, a huge demand for properties along the Mediterranean Coast remains among foreigners, especially Germans, Britons and Russians.
Grinding to a halt
Greece’s housing market had 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, annual house price changes were 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’s, 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 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 fudged its figures to gain entry into the Eurozone. Its budget deficit was never below 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 led to a cycle of debt-financed growth and deficit-spending. As part of the Eurozone, the spread over Greece’s sovereign debt lowered, allowing it to borrow cheaply. Access to cheap funds allowed it to continually pump-prime the economy, leading to higher growth.
With higher growth, government officials found it rightful that they can 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. Compared to the GDP, the ratio slid from 103.7% of GDP in 2001 to an average of 97.4% of GDP from 2003 to 2008. The national debt rose to 115% of GDP in 2009 and is expected to rise further to around 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. In power since 2004, New Democracy 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 what the previous government claimed. As expected, 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
Cheap credit also found its way to the housing market, marked by the rapid expansion of the mortgage market. Outstanding housing loans grew by an average of 30% annually from 2001 to 2007; rising from €11.3 billion in 2000 to €69.4billion in 2007. As percentage of GDP, the mortgage market expanded from 8.3% of GDP in 200 to 30.3% of GDP in 2007.
The credit crunch slowed down the expansion of the mortgage market to 12% in 2008 and 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 a low of €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 has remained 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 remains vulnerable to interest rate movements; the 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.
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 led to a sharp dichotomy in the housing situation 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 massive reconstruction or rehabilitation.
On the other hand, dwellings units in urban areas are also among the most crowded in Europe. Most children continue to live with their parents even if 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 drop in construction activity to continue 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.
This article has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.