The significant rise in euro interbank interest rates on the back of the credit crisis represents an important hurdle for the local residential market but it would take a recession or a significant deceleration in Greek economic growth to bring it to its knees next year, which is rather unlikely. The Greek residential market is one of the hottest in Europe over the last 10 years through 2006. According to Citigroup, home selling prices rose by 137 percent in Greece during this period, compared to 253 percent in Ireland, 196 percent in Spain and 173 percent in Great Britain. In the case of Greece, Ireland and Spain, there is a common denominator which explains to a great extent this high house inflation: This is no other than the low nominal interest rates that the euro brought to them. It should be noted that borrowers in some of these countries faced negative real interest rates during the 2002-2006 period because consumer price inflation was lower than the nominal interest rates they paid. Of course, low interest rates were not the only reason behind the buoyant real estate markets. Population rise The increase of their populations, mainly due to the arrival of new immigrants, also played a role. The population of Ireland increased by 1.1 percent annually on average from 1990 through 2004, while the Greek and the Spanish populations rose by 0.7 percent. Great Britain’s increased by 0.3 percent, while the average increase in the eurozone was 0.4 percent. In addition, the number of Greek households increased faster than the population in general as more young people sought to have their own roofs and the number of divorces increased. This added to the demand for housing along with a jump in the number of individuals in the 30-40 age group who have more purchasing power. Strong growth General economic conditions were also supportive of the local housing market, as strong economic growth in the tune of 3.3-4.0 percent annually during this period supported a rise in employment and wage growth. All these factors have led to a decrease in the number of individuals per home to 1.96 in Greece from 2.17 in 1990, according to Citigroup. It must be noted, however, that others put the Greek figure much higher at 2.6 persons. The number has come down to 1.86 in Spain, 2.28 in Great Britain, 2.98 in Ireland and 2.17 in Europe on average, according to the US bank. In general, analysts argue the higher the number of inhabitants, the better for the local real estate market. Still, the availability of cheap loans made the big difference according to real estate agents. Even in 2005 and 2006, when floating rate mortgage loans were adjusted to higher levels to reflect the fact that the European Central Bank (ECB) had raised its key interest rate from 2.0 percent in November 2005 to 4.0 percent in June this year, home prices continued to register strong gains. This may be partly explained by the fact that commercial banks absorbed part of the ECB rate increase by reducing the spreads they charged to their customers on new mortgages in a bid to soften the blow and keep strong loan volume growth rates going to please their shareholders. Banks also encouraged the new clients and helped the old ones cope with the higher ECB rates by extending the life of their loans to up to 40 years. This way, their customers ended up paying lower monthly installments. Changed times However, times have changed. Most local banks are forced to borrow money on the interbank market where euro interest rates have picked up in the aftermath of the credit crisis, to fund part of their assets, including loans. With the three-month Euribor reference rate at 5.0 percent, most banks have no option but to convert ECB rate-based loans to Euribor-based loans and pass the increased costs on to their clients who have taken out floating-rate mortgages. We should note that some 90 percent or more of all mortgage loans in Greece are based on adjustable interest rates. This is not a favorable development, neither for Greek borrowers nor for the local residential real estate industry, and it comes at a time when there is an unspecified stockpile of unsold homes built by contractors with building permits issued in a rush in late 2005 before the imposition of value-added tax. So, the situation does not look very promising for the Greek home market. However, it is much better than in other EU countries where household debt is much higher. The debt as a percentage of national income is estimated at 82 percent for Greece versus 164 percent in Ireland, 155 percent in Great Britain and 118 percent in Spain, according to Citigroup. This means the Greek real estate market is better positioned than others to withstand the increase in euro interest rates. The fact that buying and selling for investment purposes is very limited at best and perhaps negligible reinforces its defensive nature. Undoubtedly, higher borrowing costs impose a financial burden on indebted households and discourage others from getting a loan. However, even if one ignores the kind of mortgage loans with the very low introductory interest rates offered by the banks, interest rates are still low based on historical standards. So, the critical point will be whether the Greek economy will keep on growing at high growth rates next year, generating new jobs and producing higher incomes. As long as this happens, the risk of a sharp decline in the prices of Greek homes is highly unlikely. In other words, the burden of higher interest rates will undoubtedly bear on the industry but will not be so heavy as to break it as long as the economy continues to remain in high gear.