A number of European residential real estate markets are feeling the heat of the credit crisis, emanating from the slump in the US home market and the steep price rises of the last few years but the Greek market has yet to feel the pain, though clouds continue to gather on the horizon. Can it be the exception? Depending on the real estate agent one asks, the average price of new houses in Greece remained broadly unchanged or rose last year. According to data from the branch network of REMAX in Greece, the average selling prices were more or less the same last year as the year before. On the other hand, the average price of a new flat in central Athens went up 8.8 percent in 2007 compared to the average price a year earlier, according to a report produced by Aspis Real Estate company. The price appreciation was as high as 9.3 percent in the more expensive Athenian suburbs, 15.4 percent in the least expensive western Athens suburbs, 12.2 percent in the fast-growing eastern suburbs but only 6.4 percent in the Piraeus area, based on actual deals completed by its branch network last year. Citi has estimated in a previous report that home sale prices rose 137 percent in the last 10 years through 2006 in Greece but more than doubled in Ireland, up 253 percent, and almost doubled in Spain, up 196 percent. In view of the US house market experience and the ensuing credit and stock market crises, many analysts have been extremely wary of the Spanish and other European real estate markets which have experienced sharp price increases over such a protracted period of time. So, it comes as no surprise that the word «bubble» has been used to describe the situation in some of these markets. The slump in these markets along with the rise in euro interbank interest rates has caused alarm but the majority of executives in Greek real estate companies and banks argue that the worries are unfounded. To make their point, they often cite the fact that Greece’s home ownership ratio stands around 80 percent, meaning that Greeks feel less pressure to sell. According to Alpha Bank, house price growth slowed down to about 5 percent in mid-2007 compared to 13 percent in 2006. At the same time, they point to the ratio of Greek house prices to per capita household disposable income, an indicator of affordability. The ratio has been rising at a modest pace since 2000 and appears to have remained broadly stable in the last three years, holding below 120. This is not the case with other European markets such as Spain, Denmark, Italy and the UK where the ratio has been rising much faster over the 2000-2006 period. To support its argument that the Greek real estate market is in relatively good shape, Alpha Bank also points to the evolution of the ratio of house prices to rents over the 2000-2006 period. They also underline that Greece is emerging as the new real estate destination for holiday and retirement homes and therefore expect the real estate market to experience high growth of investment in the coming years. Optimism Executives at real estate companies are also upbeat, despite the gloomy international environment, because they think many Greeks who postponed their first home purchases in 2007, awaiting the new tax measures, will make a move this year. Under the new law, Greeks do not pay taxes when they acquire their first house valued up to 300,000 euros with a surface of up to 200 square meters. They also expect demand to arise from two other sources. First, people who will rush to buy their house before the state again ups the so called objective values of properties on which taxes are calculated. Second, those who had long expected the inheritance tax to fall sharply, now at 1 percent, to buy property for their offspring. According to them, this extra demand will reduce the surplus of new houses, estimated at tens of thousands around the country, taking pressure off sale prices and increasing the number of transactions. All these reasons are valid and one could even add a few more relating to demographics such as the decreasing number of individuals per household due to divorces and changing social preferences. However, it is well known that Greece’s real estate boom was based on strong demand by households who took advantage of the lower interest rates in generations following Greece’s entry to the eurozone in 2001. This demand for housing was also supported by rising disposable income and higher employment rates as well as the influx of a million immigrants or so in the last 10 years which created greater needs for housing. Moreover, many Greeks decided to buy new houses with higher safety standards following the 1999 earthquake in Athens. The imposition of VAT and a string of objective value increases also boosted demand. What is happening now? The boost from the imposition of VAT and the increase in objective value are not as powerful as before. The same is true about the extra demand for new houses created by the strong 1999 earthquake in the Athens region where more than 4 million people live. In addition, the flow of immigrants into the country does not appear to be as strong as before and many of the older immigrants have managed to buy a used apartment. Worse still, the interest rate for new mortgages are not as attractive as before and banks are applying tighter lending criteria, such as refraining from providing a loan which exceeds the commercial value of the property. Already, there are reports of fewer people applying for mortgages and this is not a good sign for the residential real estate industry. Naturally, the situation will become even more tense if the economy slows down considerably. It is true that the fragmented Greek real estate market is in much better shape than its Spanish and UK counterparts. However, this is no reason to think it will escape unscathed if the international credit crisis turns into a recession in the US and a sharp economic slowdown in Europe. Some of the solid foundations laid in the recent past are no longer there.