Real estate professionals are expecting a sharp decline in demand for property and, therefore, a drop in prices beginning in 2007. They estimated that the already implemented changes in property taxation and the expected rise in interest rates will lead potential buyers to postpone their plans to see how things turn out. Not even small construction firms have been able to evaluate precisely the extra cost the introduction of value-added tax (VAT) has brought on new construction. Since January 1, 2006, when VAT was introduced, only a few dozen building permits have been issued, precisely because of the prevailing uncertainty, while the first houses whose prices will include the VAT are expected to be ready in 2007. Bank of Greece Governor Nicholas Garganas remarked last week, when he presented his annual report on the state of the economy, that the new property tax legislation is too complicated. Property transfer is now subject to four different taxes (VAT, Automatic Capital Gains Tax, Property Transfer Tax and Transaction Levy), while for tax computation purposes two different property values will be used, depending on the case. «At the same time,» Garganas says, «two more taxes, the Tax on Large Estates and the Property Levy, continue to be imposed and at high rates, too.» This does not just burden the property sector, Greece’s top banker believes. High property transfer taxes are also to blame for the low geographical mobility of employees and, consequently, for the inability of the Greek economy to adapt quickly to new conditions. Retail bankers, on their part, believe that demand will continue unabated. Emporiki Real Estate general manager Antonis Zambelis says that demand for housing loans is unchanged from 2005, but does not exclude a drop in demand, and a related drop in the property market, for 2007. In his report, Garganas says that the expected hike in interest rates by the European Central Bank is expected to dampen demand for property and lead to lower prices «in the medium term.» To the above, one must add the revision of «objective values» – property values used for taxation purposes – to market-value levels in 2007 and 2008 recently announced by Economy and Finance Minister Giorgos Alogoskoufis. According to real estate professional Nikos Yianoulelis, property prices will start falling in 2007, because of several factors that will dampen demand. These factors are: – A declining trend in the land market. Prices for land plots have fallen 10 percent since October 2005 and a further drop is expected. – A decline in demand for housing from its December 2005 highs. By the end of 2006, demand is expected to drop at least 15 percent. – The great reserves of housing to be created by the building of apartment blocks, the building permit for which was issued in December 2005, to avoid the VAT. The reserves are expected to be at least double the demand. – A declining trend in rents, which leads people to prefer renting to buying at very high prices. Neighborhoods across Athens are full of rental ads, and property owners, who have seen their apartments stay empty for quite a while, are ready to be more reasonable in their demands. – The rise in housing loan interest rates. – The combination of higher rates and lower rents has created a situation whereby the monthly installment in a 30-year housing loan is now double the rent to be paid for the same property. The installment in a 15-year loan is triple the rent’s level. The consensus is that the above factors will lead to a drop in property prices starting in the summer of 2007. Why not earlier? Because many contractors have still plenty of cash available or have bought land plots when the market was high. There is also the psychological effect of the adage that property prices never drop in Greece, despite the fact that the prices of office and retail space has done exactly that since 2002. If the government had not announced a rise in objective values, maybe prices would begin to drop earlier.