By Dimitris Kontogiannis

Greece’s residential real estate market is bound to suffer a further decline in prices over the next six months as personal incomes are squeezed, taxes continue to bite into savings and earnings, and mortgage credit availability remains tight despite more evidence supporting the country’s continued membership in the eurozone. In this regard, the dismal state of the residential property market is bound to weigh once again on the economy, which is seen contracting for the sixth consecutive year in 2013.

The home market has long been regarded by the average citizen as a safe and good investment. Generations of Greeks have held this belief, which is rooted in the drachma period when real estate property proved to be a good hedge against inflation. Even relatively short-term episodes of weakness have done little to change this fundamental point of view.

The freezing of rental rates imposed by the government in the 1978-1981 period was one such episode and it resulted in a high stock of unsold homes. Another period of weakness occurred between 1988 and 1991 when inflation hit a record high and the public rushed to buy bank notes (i.e. ETVA bank bonds) offering tax-free interest rates in excess of 20 percent.

With bank credit either unavailable or extremely expensive at the time, households largely used cash to carry out their real estate transactions. So, many preferred to park their money in high-yielding government debt instruments -- usually treasury bills, or state-owned bank notes from the Hellenic Investment Bank for Industrial Development (ETVA) -- rather than buy property during that period.

Still, the nominal prices of apartments rose during the 1988-1991 period but fell in real terms, that is, after their adjustment to take into account high inflation.

From both in the 1978-1981 and 1988-1991 periods, veteran realtors recall a large stock of unsold houses being built as demand lagged behind supply, resembling in many ways the current state of the residential market.

The perception of the robustness of the home property market did not change after Greece’s entry into the eurozone in 2001. Economic expansion, record-low mortgage rates and ample liquidity helped fuel a rally that resulted in prices more than doubling during the first seven years of the new century, reinforcing the popular view about the local property market.

Still, the past episodes of weakness during the drachma period and the depression of the home market in the last few years share a common denominator: a large inventory of unsold houses.

Although there are no official figures to support claims that there is a large stock of unsold houses, it is generally believed that the number exceeds 100,000 units and perhaps even 150,000, while other experts put the number at above 200,000. It is also widely accepted that the number of old apartments -- namely those built at least 10 years ago -- in the inventory has increased sharply since 2010 as households and others put them up for sale in order to raise precious cash.

Some suspect that banks may be behind the surge in unsold old houses as they press borrowers to service their loans under a prohibition by law to auction mortgaged first homes with a legal value of less than 200,000 euros.

This house overhang has contributed significantly to the downward pressure on values since 2008. The Bank of Greece puts the decline from the peak at a bit more than 20 percent based on data provided by local credit institutions. Real estate agents, however, put the drop in value at between 30 and 50 percent depending on location, size and construction characteristics.

The drop in values, meanwhile, has been accompanied by an even more severe fall in transactions as many potential buyers continue to sit on the sidelines, expecting prices to fall further and to see how their own financial situation evolves in the worst economic crisis to hit the country in decades.

Official and consensus market forecasts put the contraction of the economy at between 3.5 and 5 percent in 2013, while the unemployment rate is projected to rise to new heights as fresh austerity measures weigh in. The protracted recession is likely to lead to more deleveraging next year despite the anticipated recapitalization of local banks, therefore depriving the residential market of a boost from fresh mortgage loans. Moreover, the heavy tax burden placed on properties over the last couple of years has also helped dampen demand for housing while adverse demographics do not help either.

Taking all this into account, house prices will have to fall further ceteris paribus (other things being constant) for the residential property market to clear in the next few years. The decline may speed up if banks are allowed to put foreclosed houses on sale, but the new equilibrium in the residential market will most likely be at lower levels.

For the price slump to come to an end, the economy has to stabilize, the unemployment rate has to stop rising, mortgage credit must become available at reasonable interest rates and the country’s future in the eurozone needs to be secured. Based on current trends, it is difficult to see how this can happen before the second half of 2014 at the earliest.