The Greek construction and real estate industries have been in recession for some time but the impact on the economy has been felt more in the first few months of 2009. Although these industries are less leveraged than in other eurozone countries, the risk of a protracted slump is not negligible and should not be ignored because it may drag the economy into a long period of subpar growth. Economists, the media and others have been busy pointing out how important the performance of tourism this summer will be for the local economy and they are absolutely right. Equally important, however, particularly for the Greek economy, is whether the real estate and construction industries will be able to exit their months’ long slump. The government moved at the end of April to address the problem by announcing a set of tax relief and other measures, aimed mostly at boosting demand for housing and commercial property. The measures received a mixed reception, with some market players saying they were in the right direction and others claiming they did not go far enough to make any real difference. Since then, real estate brokers have reported a pick up in interest, expressed in the form of more phone calls and visits to their offices by potential buyers, but this interest has yet to translate into a significant increase in transactions. It may sound unfair but it may not be the measures which have made the difference but the banks in the second quarter. With the European Central Bank having cut its refinancing rate to 1.0 percent and providing unlimited funds to banks at that low rate, dragging lower other market rates, such as Euribor, Greek credit institutions have been able to offer more mortgages at more attractive interest rates. As potential buyers become aware of the new possibilities, demand for housing gradually strengthens aided by the «advertisement» effect of the new state measures. Given the fact that the June-July period has been seasonally strong for apartment purchases and weak afterward, it should not come as a surprise if demand picks up as we approach this period. However, this development will not be representative of the market’s underlying strength. Experts agree that even if demand picks up, it will not surpass last year’s housing units sold, estimated at around 40,000, of which more than half and perhaps as many as 80 percent were old apartments. This is not enough to absorb a good deal of the oversupply of more than 100,000 and perhaps as many as 250,000 new houses at the same time that thousands of new flats are coming onto the market. The pessimists estimate the number of new houses coming onto the market at 20,000 this year, which means the oversupply is getting growing, not decreasing. This number is disputed by the optimists who say constructors stop building if they have not sold more than 20 to 30 percent of flats in an apartment building. It is also known that developers do not build new office buildings unless they have secured buyers or long-term leases, contributing to the double digit drop in construction activity reported in the first two months of the year. Assuming the overhang is around 120,000 new units and buyers absorb about 60,000 in an average year, this means the inventory of new houses in the Greek market amounts to two years’ sales. This is quite a large number when eight months’ sales are considered a normal level in other countries. The fact that prices have not come down faster here has perhaps more to do with the low leverage of the majority of Greek constructors who have earned large profits for many years. Still, the normalization of the real estate market – and especially its residential component which is the largest – is very important for the Greek economy in which construction investment spending accounts for a larger share of GDP than in other eurozone economies and real estate holdings account for 80 to 90 percent of households’ net worth, influencing consumer spending. According to all pundits, the weak demand for new flats should be attributed to high prices, the uncertainty about job security, the general economic environment and the unwillingness of some banks to grant mortgages in the first two months of 2009 and the last quarter of 2008. By taking measures to boost demand, the government hopes to bolster construction activity and reduce the overhang in the residential market. However, this helps stabilize prices at a time many potential buyers would like to see prices for new flats slashed. Unless this situation is addressed, the risk of a protracted slump in one of the country’s most important industries is real and threatens to put the economy in a low growth trajectory for some time.