BUSINESS

Noose set to tighten on property market this year

By Dimitris Kontogiannis

Greece's housing industry suffered one of its worst years since the Second World War in 2010, contributing to the economic recession.

Unfortunately, the outlook is not good this year, raising concerns about the length and the depth of the adjustment in the industry and its impact on the economy.

The residential property market has been one of the major pillars of Greek gross domestic product growth for decades, surpassing in importance other eurozone countries with the exception of Ireland and Spain in some aspects in the last few years, according to experts.

The sector has contributed more than 0.5 of a percentage point annually to GDP from 1998 through 2007 and even approached 0.9 of a point if one takes into effect positive spillover effects to other sectors and the positive wealth effects from rising prices.

Only Ireland and Spain, which experienced a bubble, did better during the same period since the contribution of the industry to their economies is estimated at close to 1.5 and 1.2 points annually to GDP respectively.

The positive effect of the housing market on the Greek economy was linked to strong private residential investment and its impact on employment in the sector and related industries such as building materials and services such as electricians, plumbers etc.

Strong demand for housing on the back of rising disposable income and lower interest rates helped prop up prices and keep residential investment activity at high rates from early 2000 through 2007.

The buoyant demand was underpinned by disposable income, that is the after-tax income left for consumption and savings, which rose by 3.0 percent or more annually from 1999 through 2008.

The sharp drop in interest rates, especially following the adoption of the euro, also boosted demand for housing with average annual mortgage growth rates exceeding 25 percent over the same periods.

Demand was also aided by favorable demographic trends, with immigrants playing an important role since they are estimated to have boosted the number of households by more than 100,000.

It is noted that population growth in the segment comprised of people aged 30 to mid-40s was perky during this period, although overall total population growth was very weak.

Moreover, there was the decline in the size of the average household to about 2.7 persons in the previous decade from more than 3.0 in the 1990s.

Higher house prices also helped the economy via the positive wealth effect on private consumption. It is noted the vast majority of Greek household wealth is held in the form of real estate and not so much in financial investments such as bonds, stocks etc.

However, the Greek residential market has experienced a contraction in investment activity and deals since 2008 which became more evident in 2010. Although house prices exhibited some kind of resilience in the first year or so of the adjustment, this is not the case any longer.

Of course, the sharp increase in new houses built in 2006 and 2007 aggravated the imbalances in the sector by boosting the supply of new dwellings to more than 120,000 units. Some even put it above 150,000 units.

This made it even more difficult for the market to accommodate the oversupply as the international economic crisis set in, followed by the Greek recession.

Despite a sharp drop in permits for new houses in the 2009-2010 period, the overhang has proved difficult for the market to absorb. Although there are no official figures, real estate agents estimate that less than 50,000 new and old houses changed hands in 2010 compared to more than 70,000 in 2009.

The same agents put the average number of deals at approximately 100,000 units annually over the previous decade.

At this point, all pundits agree that things do not look rosy for the residential property market, which experienced a drop in prices ranging from 10 to 30 percent or more depending on the house and the location over the last two years.

They expect the decline in house prices to continue this year as the recession bites incomes and jobs for the third consecutive year and higher taxes and perhaps higher so-called «objective prices» on which taxes are calculated as the government seeks more revenues to plug the budget hole.

Moreover, mortgage financing has become more expensive with spreads over Euribor set close to 3.0 percent or higher compared to 1.0-1.5 percentage points just a few years ago.

In addition, loans have become more scarce as banks try to hoard precious liquidity and are more selective in providing credit.

For all these reasons, it is hard to see how private residential activity will rebound this year and house prices will stop declining with the supply overhang and economic and financing conditions becoming even more restrictive.

This means one of the main pillars of past Greek GDP growth will continue to be a drag on the economy in 2011, hurting consumer and business confidence.

All in all, 2011 looks set to be another dismal year for the local residential property market and this should be a concern to planners given its importance to the economy.

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