It is no secret that the Greek economy is in turmoil and the fallout is being felt in every corner of the nation, including the property market. Analysts believe the country’s economy will shrink by another 7% by the end of 2012 and residential property prices are tumbling in tandem with the country’s financial prospects. Residential real estate transactions have dropped and every type of property is experiencing price falls. Now Greeks face austerity measures that will involve tax increases, spending cuts and mass layoffs that will leave less money to be invested in real estate. For more on this continue reading the following article from Global Property Guide.
Residential property prices in Greece continue to plunge, with the Greek economy enduring one of the worst crises in its history. Greece is already on its fifth year of recession, with the economy expected to contract by 7% in 2012.
The average price of apartments in Greece plunged by 9.83% y-o-y to Q1 2012, according to the Bank of Greece. When adjusted for inflation, property prices actually dropped by 11.62% over the same period.
During the year to Q1 2012, prices of old apartments (5 years or older) fell 8.6%, with prices of newer apartments falling 10.3%.
Almost all cities in the country experienced house price falls.
- In Athens, average house prices fell 9.9% y-o-y to end-Q1 2012
- In Thessaloniki (the second largest city) prices fell 10.1% over the same period
- In “all other cities”, house prices dropped 8.8% y-o-y in Q1 2012
- In “all other areas”, prices fell 8.2% over the same period
Residential real estate transactions fell in number, volume, and value. In the first quarter of 2012, the total number of residential real estate transactions was down 54.1% to 5,874 from a year earlier. On the other hand, the volume and value of real estate transaction plunged by 52.1% and 56.5%, respectively.
In June 2012, the total amount of outstanding housing loans in Greece fell by 3.5% to €76.6 billion from the same period last year, based on figures released by the Bank of Greece.
Non-performing mortgages in the country already reached 17.2% of the total outstanding mortgages in the first quarter of 2012, up from 15% in the previous quarter.
Since May 2010, Greece has been granted two successive rescue loan packages by European leaders and the International Monetary Fund (IMF) worth €110 billion and €130 billion, tied to a stiff austerity package. The austerity measures imposed by the government include:
- Tax increases
- Spending cuts
- Privatization of government-controlled corporations
- Slashing salaries
- Slashing pensions, especially for high-income retirees
- Taxing low-income earners. The taxable income threshold would be reduced to EUR5,000 from EUR8,000
- Placing about 30,000 public workers in labor reserve
Other reforms include strengthening laws against rampant tax evasion, liberalizing the labour market and selling state assets.
Some of the moves were not accepted by the public, and violent protests, rallies, strikeouts took place in key areas.
In the first quarter of 2012, the economy is estimated to have contracted by 6.5% from a year earlier. The economy is expected to shrink by more than 7% in 2012. GDP had fallen by 6.9% in 2011, 3.5% in 2010, 3.3% in 2009 and 0.14% in 2008.
In 2011, the country’s budget deficit was 9.1% of GDP, from a staggering 15.8% of GDP in 2009. In 2012, Greece aims to reduce the deficit to about 7.3% of GDP. The troika requires the country to reduce its budget deficit to below 3% of GDP by end-2014. But the country is seeking a two-year extension to reach its budget deficit targets.
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.
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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.
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.
Greece is already on its fifth year of recession. In the first quarter of 2012, the economy is estimated to have contracted by 6.5% from a year earlier. In 2012, the economy is expected to shrink by more than 7%. GDP fell 6.9% in 2011, 3.5% in 2010, 3.3% in 2009 and 0.14% in 2008. This was in sharp contrast with the average annual GDP growth from 2000 to 2007 of about 4.2%, among the highest in the EU and OECD.
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.
In 2011, the country’s budget deficit was 9.1% of GDP, down from a staggering 15.8% of GDP in 2009. In 2012, Greece aims to reduce the deficit to about 7.3% of GDP. The troika requires the country to reduce its budget deficit to below 3% of GDP by end-2014. But the country is seeking a two-year extension to reach its budget deficit targets.
By end-2011, Greece’s public debt peaked at 165.3% of GDP, before the government completed a debt write-off deal with its private sector creditors. In the first quarter of 2012, public debt was reduced to 132.4% of GDP.
The country’s overall unemployment rate hit 22.5% in April 2012, up from 16.2% from the same month last year, according to Eurostat. Among young people, the jobless rate was 52.8% over the same period. This is far from the average unemployment rate of 9.2% from 2003 to 2008.
In June 2012, the overall inflation rate eased to 1.3%, according to EL.STAT, the country’s statistical service. Consumer prices rose by 3.1% in 2011.
This article was republished with permission from Global Property Guide.