Housing crisis in Greece: overheated economy and high inflation - a recipe for new real estate price growth?

The Greek real estate market has experienced two housing price crashes since2008. Over the past five years, housing prices have been rapidly increasing thanks to strong economic growth and low interest rates. The most recent data shows that prices rose by11.2% in the third quarter of2022. However, with rising energy costs and increasing interest rates, which increase borrowing costs, could a crash in the Greek real estate market occur? In this article, we will examine historical and recent data, as well as factors influencing housing prices, to predict whether Greece is on the verge of a housing price crash.

What is a real estate market crash?

Like many other assets, real estate goes through cycles of booms and busts. A real estate bubble occurs when housing prices rapidly rise and exceed their fundamental value. Housing prices typically rise due to low mortgage interest rates and improvements in housing conditions, leading to demand outpacing supply in the market. When housing prices continue to rise to unsustainable levels and demand decreases, the bubble may burst, leading to a decrease in property value. The condition when housing prices fall after a sharp rise is often referred to as a real estate market crash.

"Several factors affect the real estate market crash."

Mortgage interest rates may rise as a result of the central bank increasing interest rates. If homeowners are unable to meet the new, higher mortgage payments, they may face eviction. This will increase the number of houses on the market for sale. Declines in household incomes due to inflationary pressures or job losses during recessions can also reduce demand for housing..

Historical context of the housing crisis in Greece

According to the Global Property Guide, the property bubble in Greece led to a sharp increase in housing prices in the early2000s. In particular, prices for seaside properties grew by30-40% annually in2004. The property bubble in Greece burst in2008 when the global financial crisis of2007-2008 hit the country's economy, causing a prolonged recession lasting until2017. Greece's economic growth up to2007 was driven by strong domestic demand supported by government and private borrowing. However, incomes did not match government spending, leading to large deficits and historically high public debt, resulting in a debt crisis according to the Bank of Greece. Greece officially entered a recession in2009 with a3.2% GDP contraction,15.7% GDP deficit, and public debt reaching129.7% of GDP. From2009 to2013, Greece's economy showed negative growth, with a sharp decline of10.15% in2011. The economy briefly recovered in2014, then declined again in2015-2016 before exiting recession in2017. Households' incomes in Greece dropped by33% from2009 to2017, and property prices fell by42.5% from2007 to2017. A report by Alpha Bank highlighted that over a third of households struggled to meet tax obligations and mortgage repayments, leading to significant property price reductions. Greece saw an oversupply in the housing market in the early2000s, which, combined with high homeownership rates, further lowered prices.

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 an annual increase of 9.8% in the first quarter of 2022. According to Alpha Bank, the real annual growth of investments in residential construction was 18.6% in the first quarter of 2022. Property prices in the Greek housing market 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 strong rise in housing prices is a result of Greece's struggle, like that of all European countries, with rising inflation and high interest rates. Despite the positive signals from the latest data, 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 Greek real estate market 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. The materials that showed the highest annual growth are electricity, diesel fuel, and bricks, according to ELSTAT, the Index of Material Costs for the Construction of New Residential Buildings, as reported by Alpha Bank. Another factor is the potential delay in investment projects and foreign direct investments (FDI), which could reduce the housing supply in the medium term, the bank added.

Slowdown of economic growth

The European Commission's autumn economic forecast predicts a significant slowdown in Greece's GDP growth to 1% in 2023, down from 6% in 2022, due to a decrease in economic activity and rising inflationary pressures. "Consumers are expected to adjust their consumption decisions to higher prices and the associated reduction in real incomes. In an environment of high uncertainty, tighter 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 forecast states. Economic growth in the country is expected to recover to 2% in 2024 with a decline in inflation.

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 interest rates three times since the tightening process began in July, bringing the rate to 2% in November from 0.50% in July 2022. The mortgage interest rate in Greece was increased to 4% in October 2022 from 3.01% in August 2022, the Bank of Greece announced on December 2. On November 14, ABN-Amro Group expected the ECB to continue raising interest rates to 2.5% in the first quarter of 2023 to reduce inflation. It is anticipated that the central bank will start lowering rates at the end of 2023.

Forecasts for the Greek real estate market for 2023 and beyond

Will the Greek real estate market be subject to a new cycle of collapse next year? According to the real estate service The Greek Guru, the growth of housing prices in Greece is expected to slow down in 2023 after five years of rapid increases. Citing former Deputy Governor of the Bank of Greece Theodoros Mitrakos, The Greek Guru notes 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 after-tax household income in Greece will decrease by 20% by 2024, with only part of this being offset by wage increases, Mitrakos stated in the report. On December 14, Trading Economics predicted that the housing index in Greece could be around 80.00 points in 2023.