Will the bubble burst?

Within the space of a couple of years, housing prices in Athens have risen by over 30 percent. In this context, the recent trend toward a decline was expected and healthy. There are, however, many market experts who say this is only a passing phase and that prices will rise again. This attitude is understandable, given that the Greek housing market, in contrast to markets elsewhere, has not yet experienced a full cycle of downturn and recovery. This fuels the hopes of those who like to believe that investing in property is a smart thing. This widespread belief that a property does not lose value also leads potential buyers to accept high prices without too much complaint. This belief has been strengthened by the lack of even a rudimentary housing policy by the state and local authorities. Town plans are never revised on time and when they are, it is because the building of illegal housing has reached such a point that one, finally, has to acknowledge their existence, for a crackdown would be costly – in terms of votes. Because they follow, rather than anticipate, developments, revised town plans are notoriously lacking in transport and other infrastructure accessibility. This attitude on behalf of the State, plus the high taxes imposed, on an «imputed» value of the properties, encourages speculation, if not downright illegality. In the end, it is only demand, not supply, that dictates prices; moreover, the demand is driven by gains in income derived from the black economy, which is the final arbiter of prices. Last year, we spent 5.7 percent of our gross domestic product on property investments, up from 4.8 percent in 2001. Mortgage loans increased 38.9 percent in 2001 and 35.6 percent in 2002. At the same time, construction costs are low, rising 2.8 percent in 2002. If it is the gains from the black economy that sustain the property price bubble, it is the modernization and restructuring of the economy, the strengthening of competition and the improvement in the efficiency of state administration that will burst it, as well as Greece’s increasing integration into the European economy. All these factors will affect household income and the way in which we manage our finances.