Greece's house price crash: Overheated economy and high inflation setting the stage for a new real estate price bomb?

Should we expect another real estate bubble due to an overheated economy and high inflation? The Greek housing market has withstood two house price collapses since 2008. Over the past five years, house prices have skyrocketed thanks to strong economic growth and low interest rates. According to the latest data, prices rose 11.2% in the third quarter of 2022. However, as energy costs and interest rates rise, borrowing costs are rising. Is the bubble in the Greek real estate market getting ready to burst? In this article, we look at historical and recent data, as well as factors affecting house prices, to predict whether Greece is on the verge of a house price collapse.

What is the housing price collapse?

Like many other assets, real estate is subject to boom and bust cycles. A housing bubble occurs when housing prices skyrocket and exceed their real value. Home prices typically rise due to low mortgage interest rates and home improvements, which creates demand that exceeds the supply in the market. When home prices continue to rise to unsustainable levels and demand decreases, the bubble can burst, causing real estate values to fall. A condition where home prices fall after a rapid rise is often referred to as a real estate market collapse.

Several factors are influencing the collapse in home prices.

Mortgage rates may rise due to the central bank raising interest rates. If homeowners cannot repay the new, higher mortgage payments, they may have trouble paying their mortgages. This will increase the amount of affordable housing on the market for sale. Reduced household incomes due to inflationary pressures or job losses during recessions can also reduce demand for housing.

A history of house price collapses in Greece.

According to Global Property Guide, a bubble in the Greek real estate market led to skyrocketing house prices in the early 2000s. In particular, prices of houses by the sea increased by 30-40% annually in 2004. The housing bubble in Greece burst in 2008, when the global financial crisis of 2007-2008 hit the country's economy and began a long recession that lasted until 2017.

Until 2007, Greece's economic growth was driven by strong domestic demand stimulated by public and private borrowing.

At the same time, revenues were not kept up by government spending. The result was large deficits and historically high public debt, which led to a public debt crisis, as the Bank of Greece, the country's central bank, points out in its report "Chronicle of the Great Crisis - Bank of Greece 2008-2013".

Greece's economy deteriorated and officially entered recession in 2009.

The country's gross domestic product (GDP) fell by 3.2%, the deficit rose to 15.7% of GDP and public debt amounted to 129.7% of GDP. From 2009 to 2013, the Greek economy recorded negative growth, with the sharpest contraction in 2011 at 10.15%, according to Macrotrends. The economy briefly recovered in 2014, then returned to negative growth in 2015-2016 and exited recession in 2017.

From 2010 to the second quarter of 2022, the housing market in Greece recorded a 22.5% decline in housing prices - the sharpest drop among the 24 member countries of the European Union, according to data from Eurostat, the EU's statistical office.

Housing prices in Greece began to recover in 2017, with the annual rate of price decline averaging 1%, compared to an average annual decline of 2.6% in 2016, according to the Bank of Greece.

In the following years, housing prices in Greece continued to rise, with an average annual growth of 1.8% in 2018, jumping to 7.2% in 2019.

The rise in housing prices in Greece slowed to an annual rate of 4.2% in 2020 during the Covid-19 pandemic. However, in 2021, it accelerated to an annual rate of 7.1%.

Factors influencing housing prices in Greece.

In 2022, housing prices in the Greek real estate market continued to rise rapidly, with an annual rate of 11.2% in the third quarter, compared to a 9.8% increase from the first quarter of 2022. According to Alpha Bank, the real annual growth of investments in housing was 18.6% in the first quarter of 2022. Housing prices in Greece have increased by 20% from 2018 - the beginning of the recovery - to 2021, partially offsetting the losses from the prolonged recession from 2009 to 2017, the bank reported.

The rapid rise in housing prices is occurring against the backdrop of Greece's struggle, like that of all European countries, with rising inflation and high interest rates.

Despite the positive signals, there are factors that could influence the direction of housing prices in Greece.

The negative impact of the war in Ukraine.

The war in Ukraine may impact the real estate market in Greece by increasing the cost of construction materials. Prices for construction materials have risen at an annual rate of 11%, with an average increase of 9.4% over the first four months, according to ELSTAT. Another factor is the potential delay of investment projects and foreign direct investments, which could reduce the housing supply in the medium term, the bank added.

Slowdown of economic growth.

The European Commission, in its autumn economic forecast, predicts a significant slowdown in Greece's GDP growth to 1% in 2023 due to a decrease in economic activity and rising inflationary pressures. "Households are expected to adjust their consumption decisions to higher prices and the accompanying decline in real incomes. In an environment of high uncertainty, tightening financial conditions, rising production costs, and slowing demand, investment growth is likely to slow down but will continue to be supported by the Recovery and Resilience Plan," the report states.

High costs of borrowed funds.

High interest rates may affect the demand for residential real estate in Greece. The European Central Bank (ECB) has raised rates three times since the tightening process began in July, increasing the rate to 2% in November from 0.50% in July 2022. The mortgage rate in Greece was raised to 4% in October 2022 from 3.01% in August 2022, the Bank of Greece announced on December 2. On November 14, the ABN-Amro group expected the ECB to continue raising rates to 2.5% in the first quarter of 2023 to curb inflation. It is anticipated that the central bank will start lowering rates at the end of 2023.

Real estate market forecasts for Greece in 2023 and beyond.

Will the Greek real estate market be subject to the next downturn next year? According to The Greek Guru real estate service, the rise in housing prices in Greece is expected to slow down in 2023 after five years of rapid growth. Citing Theodoros Mitrakos, former vice chairman of the Bank of Greece, The Greek Guru noted on November 2 that housing prices may continue to rise, but at a slower pace in the coming quarters due to rising interest rates and declining household incomes. It is expected that household incomes in Greece, after taxes, will decrease by 20% by 2024, and only part of this amount will be offset by wage increases, Mitrakos stated in the report.

On December 14, the Trading Economics forecast indicated that the housing price index in Greece could fluctuate around 80.00 points in 2023, slightly increasing from the expected 78.00 points by the end of the fourth quarter of 2022.

Final thoughts on the potential collapse of housing prices in Greece. Analysts in this article suggest that inflationary pressure and high borrowing costs may slow the pace of housing price growth in Greece. However, they do not indicate that a collapse in housing prices in Greece is inevitable. When considering investments in the Greek real estate market, one should conduct their own analysis.