A look at the Greek housing market

If anyone is still paying any attention to this southeastern corner of the EU called Greece, he/she might have noticed that, for the first time since 2008, house prices rose during the first three quarters of 2018. Given the sky-high unemployment and fall in wages the fact that it took so long should come as no surprise. The million dollar Euro question is if the crisis will lead to a paradigm shift in the Greek property market.

As remarked upon in the opening paragraph, house prices rose in the first three quarters of 2018. Here's the chart.

source: Bank of Greece, own calculations

From a geographical point-of-view, these increases were uneven, with prices in Athens rising more compared to the rest of the country but then, with the exception of Thessaloniki, prices in Athens had also fallen more these past years. Some people take this as a sign that short-term rentals are the root-cause of this increase. They could very well be right. But the goal of this post is not to verify the truthfulness of this claim. I'm sure a few of you must feel disappointed by that. But even if this is the case, bear with me since some of the charts that will come next might indirectly answer this question.

Next, a quick peek at how activity in the sector is evolving. According to Greece's national accounts, fixed investment in dwellings started to increase in tandem with prices.

source: ELSTAT

I now want to take a look at how demand for housing is faring at the moment. One way to gauge this is by looking at the stated intentions of consumers in the European Comission's Consumer Survey.

source: European Commission

As you can surely spot in the chart above, intentions to build or purchase a home are still essentially flat-lining near their all-time lows with just a marginal uptick in the 4th quarter of 2018. At the same time, intentions to engage in home-improving work in the next 12 months have picked up and currently stand at a decent level. Maybe this particular data-point captures the effect short-term rentals have on the market. The former data-point confirms anecdotal evidence claiming that, at the moment, the vast majority of buyers are foreign, since the survey captures only the intentions of domestic consumers and these are nowhere to be seen.

The following chart provides information both for the demand and the supply side at the same time.

source: European Comission, own calculations

According to responses in European Comission's Construction Survey, the most cited reason that is currently limiting  activity in the sector is insufficient demand, having retreated slightly from its all-time highs during the summer of 2017.

So, all data-points above considered, I think we can safely conclude that domestic buyers are few and far in between right now.

But how do things look for the sector going forward? As far as domestic demand for housing goes, things do not look very rosy I'm afraid. Unemployment is still sky-high and according to Labour Ministry's data (Ergani) the majority of new jobs added are of the part-time variety. Hardly the ideal background for making someone willing to purchase or build a house. And while Greece is still fumbling around unable to come up with a new growth model (other than tourism) this trend could persist for a while.

Moreover, property taxation was increased during the crisis, to the point that it went from bringing in state coffers the Euro Area average, as a % of GDP, to bringing in double that in 2016. Of course, this acts as a major counter-incentive when it comes to owning a house and it has led many people to give up inherited real estate assets so that they won't have to pay property taxes. Given that Greece has to continue running particularly high primary budget surpluses for the foreseeable future the possibility of property taxation being reduced to its pre-crisis levels any time soon is beyond remote.

source: European Commission

Moving on to the actual means of funding a purchase, household saving is still deep in negative territory. So the only buyers financing a purchase through their own funds are those who had saved in the past or those who might have some financial assistance from their families lined up.

source: ELSTAT, own calculations

Now as far as taking up a loan is concerned, housing loans flows are still negative even though they are slowly becoming less so.

source: Bank of Greece, own calculations

Difficulties is acquiring funding could push newly-formed households that don't have a vacant family house to fall back on, into renting. Anecdotal evidence, claim that rents have increased the past two years or so but this is not supported by the rentals component of the Consumer Price Index which has not recorded a year-on-year increase since 2011.

source: ELSTAT

On the other hand, the portion of households living in rented accommodation has risen in the past two years, lending some credence to those anecdotal claims and point to this simply not being captured by the relative CPI component. Still, the chunk of households that are renting is lower than what it was in 2008, before the Greek depression started to display its considerable force. Pretty counter-intuitive but maybe explained by the trend of young people returning to live in their parents house due to the crisis kicking in.

source: ELSTAT, own calculations

Returning to the supply-side, one further issue that developers have to grapple with is a squeeze in their margins. As mentioned above house prices have dipped by about 41% since their 2008Q3 peak but construction costs have only decreased by about 7% during the same period. Drilling down further into this, labour costs have fallen by about 11,5% while the cost of materials has decreased by just 4%.

source: ELSTAT, own calculations

This could price smallest developers out of the market if and when activity picks up meaningfully and pave the way for bigger ones to gain market share, a departure from the previous paradigm of numerous small developers surely.

To wrap this up since it has become ridiculously long, it is beyond argument that domestic demand for housing in Greece is currently anemic. Whether it will pick up noticeably in the future depends on the degree that the trends outlined above will persist. If things don't change meaningfully in these respects they could lead a bigger percent of newly-formed households, compared to the past, into renting instead of buying. Of course, in life and most certainly in Greece, things rarely evolve linearly so I guess that only time will tell...