By Dimitris Kontogiannis
The Greek economy may emerge from the deep, protracted recession of the last six years in 2014 but prospects for one of the locomotives of growth in the past do not look promising. The residential real estate market is bound to have another poor year, although home prices may decline at a slower pace and transactions may pick up a bit compared to last year’s depressed levels.
The government, the European Commission, the IMF and other private forecasters see the Greek economy growing by a mere 0.2 to a more respectable 1 percent this year after a cumulative output loss of 24 percent in the previous six years. The optimists bet on stronger export performance, a positive reading in investment spending and a much smaller decline in consumption outlays to produce the economic turnaround. Others, namely some German think-tanks and the OECD disagree, forecasting a continued – albeit milder – recession in 2014. Even if one sides with the optimists and economic activity picks up steam, it is unlikely the residential market will follow suit as it takes time for growth to make a noticeable impact on the job market and drastically improve expectations regarding incomes.
In contrast, there are reasons to argue that prices will continue their downward trend but at a declining pace this year. Undoubtedly, the large fall in urban housing is directly related to the sharp drop in demand on the heels of the protracted recession and the accompanied huge job losses, bringing the unemployment rate above 27 percent. Therefore, it is not surprising that house prices in urban areas have fallen by more than 33 percent since the last quarter of 2008 through the fourth quarter of 2013, according to Bank of Greece data collected from credit institutions. Even so, real estate agents argue prices have fallen even more, putting the drop at between 40 and 60 percent on average during the last six years.
Although the large drop since 2008 has made prices more attractive, it should be put into context. House prices had more than doubled between 2000 and 2007, like in Ireland and Spain, making the residential market prone to a severe correction. Expected small job gains and the possible stabilization in disposable incomes in 2014 are positive signs – assuming they turn out to be correct – but demand for urban residences is not expected to receive a boost from another important factor.
Mortgage loans, which underpinned the rise in prices a decade earlier, are not expected to increase significantly. On one hand, banks have become more cautious as they nurture significant loan losses and on the other, households are more hesitant to ask for loans given the economic uncertainty and the six-fold rise in property taxes since 2009. Real estate analysts and advisors say the average mortgage loan provided by banks accounts for 35 percent of the value of the house nowadays, compared to 70-100 percent in 2006-2007.
Given this history, it should come as no surprise that bank loans finance a much smaller percentage of residential market transactions than prior to the economic crisis. Some claim they partly finance less than 20 percent of total transactions, compared to an estimated 80-95 percent before 2008. Even if banks start gradually providing more mortgage loans in the next few months, following their ongoing capital enhancement exercises, the volume of transactions may not increase significantly in 2014 from last year’s depressed levels.
This is not good news for the residential market because it means it will take a long time for the oversupply of houses in the market to clear. It is hard to estimate the number of houses available for sale but it may exceed 200,000 units as homeowners and construction companies look for liquidity and want to reduce the associated tax burden. Others put the number of unsold houses even higher. It is reminded that the country experienced a construction boom in 2006-2007, following a surge in construction permits in 2005 as firms and individuals scrabbled to avoid the imposition of value-added tax on new buildings from the start of 2006. The latter partially explains the oversupply.
The fact that the construction of new houses has been falling steadily through the first half of 2013, after peaking in 2006, is not enough since the number of transactions also fell during the same period. Also, there has been a change in the composition of transactions, with a shift from new to old houses since 2009, according to real estate agents. The situation on the supply side of the residential market may be aggravated further if the ban on first home foreclosures, which was extended by one more year, is partially lifted in 2015. Moreover, one should not overlook the fact that the state has become more active in selling confiscated property.
Although there are some positive signs from the demand side, assuming the economy recovers and labor market conditions improve over the year, other factors such as the tight credit criteria will continue to weigh in. On the supply side, conditions do not look good as the overhang of unsold houses is not going to go away anytime soon. So, it will take a brighter economic outlook for house demand to pick up enough to offset the pressure exerted on prices from the oversupply.