Mortgages slow down

Greece’s mortgage lending boom is likely to slow from last year’s torrid pace of growth but still be strong enough this year for Greek banks to increase profits again. Mortgage lenders enjoyed a bumper year in 2005. The market has grown since Greece abandoned the drachma to join the eurozone in 2001. Borrowing became affordable, boosting demand and driving property prices up. «The reason behind the increase in home prices in Greece has been the dramatic fall in real interest rates from about 10 percent to 1 percent,» said Gikas Hardouvelis, chief economist at EFG Eurobank. Builders and home buyers also rushed in last year to avoid a 19 percent value-added tax on new construction that became effective in January. Even after the new tax, analysts say growth in mortgage lending still has a way to go, promising earnings growth for Greek banks this year. «After an amazing run in 2005, we should see some slowdown this year but still a healthy pace,» said Costas Xenos, head of research at Egnatia Finance. «Bankers also convey this outlook – a deceleration to above 20 percent (growth in mortgage lending) from 33 percent in 2005,» he added. That should help support bank share prices, which have risen 36 percent since January 2005. Economists say population growth resulting from an increase in immigrants and a shrinking average household size translate to more potential home buyers in the years ahead. Equally important, they say, is the prevalent perception that property is a safe investment, with eight out of 10 households expecting prices to continue rising in the next 12 months despite a strong appreciation in the past decade. Mortgage boom «The fact that the majority of households consider property a long-term investment means the speculative factor is much smaller compared to other markets like stocks,» Hardouvelis said. «A possible price correction in real estate is not expected to lead to mass sales of property as supply is rather price-inelastic,» he added. Based on the latest data from the country’s central bank, mortgage lending was running at a 27.4 percent annual pace as of October and is likely to have accelerated further in the last months of 2005. It was a key driver behind Greek banks’ strong earnings for the first nine months of 2005. Full-year figures are due later this month. National Bank’s 87 profit increase was boosted by a 27.4 percent rise in its mortgage lending. Likewise, EFG Eurobank’s 54 percent earnings jump was due mainly to a 34.8 percent expansion in mortgages and consumer loans. «We expect mortgage growth to slow… but still support (banks’) revenues and net interest income,» said analyst Costas Sinanidis at Investment Bank. Net interest income generates about 70 percent of Greek bank earnings. For 2006, Citigroup forecasts that Alpha Bank is likely to increase earnings by 23 percent and National Bank by 25 percent. Alpha Bank currently trades at about 12.5 times its forecast 2006 earnings and National Bank at 13.7 times, Citigroup calculates. That compares with an average price at 11.77 times forecast earnings for banks in the Dow Jones Stoxx European bank index, according to Reuters data. Based on a January survey by pollster Metron Analysis, 2 to 8 percent of Greek households intend to buy or build homes this year and 4 to 18 percent in the next five years. The data compare well with the last two years, when about 5.2 percent bought property. Most analysts agree that new construction and associated mortgages from building permits obtained in 2005 should pass on to 2006, absorbing some of the decline from last year’s front-loaded demand. «The financing of the increase in building permits witnessed in 2005 should support credit expansion this year, offsetting to a certain extent a potential slowdown from higher taxes,» Sinanidis said. Greece boasts one of the highest home-ownership ratios in Europe. Based on the 2001 census, 74 percent of the adult population owned property. But the mortgage market has plenty of room to grow. Greece’s 40 billion euros of mortgages as of October amounted to about 22 percent of its gross domestic product. That compares with 70 percent in the UK, 42 percent in Germany and an average of 36 percent for the European Union. Credit growth still strong, November data show Credit, consumer as well as corporate, continues to be the engine driving the economy forward, according to the latest data released yesterday by the Bank of Greece. At the end of November, the annual rate of growth for credit to households and corporations was 15.1 percent, with the outstanding balance of loans standing at 133.13 billion euros. Household credit growth was 26.3 percent, with the outstanding balance at 63.34 billion euros. Corporate credit grew 6.6 percent and the balance stood at 69.79 billion. Total credit expansion stood at 14 percent at end-November, up from 12.4 percent a month before. There was also an acceleration in the rate of government borrowing (11.5 percent in November from 8.5 percent in October). Mortgages grew faster than any other category, with credit growth standing at 28.3 percent and their outstanding balance at 41.22 billion euros. This high growth is partly attributed to the introduction of 19 percent VAT on new buildings from January 1, 2006 and the rush of would-be buyers to beat the deadline. Consumer credit growth has decelerated significantly, hitting 24.6 percent in November. The outstanding balance was 20.5 billion euros. The amount of securitized mortgages and consumer loans stood at 2.2 billion and 971 million euros respectively. Credit growth to enterprises was heavily affected by the shipping sector, where growth stood at 39.3 percent in November (30.7 percent in October) and the outstanding balance was 6.2 billion euros. On the other hand, credit growth to industry was negative (-0.3 percent compared to -1.4 percent in October) and the outstanding balance was 15.7 billion.

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