ANALYSIS: DBRS
Signs of a recovery in housing markets in Greece are beginning to emerge. House prices finally showed a marginal increase in the first three quarters of 2018, after declining since 2008. The Greek economy also generated GDP growth in 2017 and is estimated to have done so in 2018. If the upward trend is sustained, DBRS expects this emerging housing recovery would strengthen the economy’s recovery.
One critical contribution from a recovery in housing would be an increase in construction activity, an important driver of growth historically for Greece. Already a rebound in building permits in some markets signals the beginning of such a rebound from their current low level. Debt markets are also likely to benefit as the recovering housing market supports better performance of mortgage loans and covered bonds.
One headwind for the recovery is the increased taxation of property. Higher tax rates and more effective collection have increased revenues, but also made homeownership costlier. Still, with no property tax increases planned, the housing market may have already absorbed the negative impact of the recent changes.
Ongoing Signs of Recovery
But now, after ten years of contraction, the Greek housing market is showing signs of recovery. In urban areas, house prices had experienced a sharp decline of 42.6% from the 2008 peak, while in Athens prices had fallen by 44.2% since 2008. In the third quarter of 2018, however, property prices across Greece rose for a third consecutive quarter, by 2.5%, according to the Bank of Greece index. A geographical breakdown shows that, in the third quarter of 2018, prices increased by 3.7% (Y-o-Y) in Athens, 1.9% in Thessaloniki, 1.2% in other cities and 1.6% in other areas of Greece.
In addition, for the first ten months of 2018, the number of building permits increased by 10.9% compared to the same period in 2017. Both the recovery of the Greek economy and the increased foreign demand seem to be the main drivers of the improvement in the residential property. Improving capital markets for Greek banks, including covered bonds, could in the future contribute to recovery of the property market.
Also positive, demand for short-term rentals in Athens and other tourist areas has been growing over the last few years. Tourism was one of the sectors that supported the Greek economy over the crisis years. In 2017, it generated direct revenue of EUR 18.3 bln, with accommodation representing 45.3% in tourist expenditures. A study conducted by the Centre of Planning and Economic Research (KEPE) shows that more than 126,000 Greek homes, apartments and properties are listed in online platforms for short-term rentals. This demand resulted in increased real estate transactions in the Athens region and in other tourist areas of Greece, triggering an upward trend in house prices. More broadly, a significant increase was recorded in the number of sales in real estate by 25.3% from 2015 to 2017, according to data collected by notaries.
Greece’s residency by investment programme, initiated in 2013, which involves a five-year resident permit in return for a EUR 250,000 investment in real estate, could also have a positive impact. Net capital inflows from abroad for property purchasing soared by 172.3% in the first nine months of 2018 compared to the same period in 2017.
However, the large stock of dwellings and the high levels of non-performing loans still exert pressure on house prices. The existing dwelling stock amounts to 6.5 million houses for a population of 9 million people. The house availability could increase further given the high levels of non-performing loans related to residential mortgages, at 44.7% of total loans in September 2018, weighing on house prices.
Reversal of Sustained Downturn in Construction
The construction industry, which was one of the most dynamic sectors of the Greek economy, was severely affected by the crisis. Investment in real estate experienced a dramatic contraction. The severe drop in construction activity suggests that, even a modest recovery in the construction industry would make an important contribution to the recovery of the economy.
Investment in housing could also play a key role in economic recovery. From 1995 until 2008, it represented on average almost 40% of total investment. By 2017, however, it had contracted to just 5% of total investment. This demonstrates some upside potential in the reversal of the sustained downturn. Signs exist of an upturn in building permits.
Property Tax Weighs on Housing Transactions
The property tax contributed to budgetary overperformance but appears to have had a significant adverse impact on the housing market. The property tax contribution increased by almost 50% from 1.7% of GDP in 2010 to 2.5% in 2011 with the imposition of “an emergency property tax”, which was collected through the national electricity company utility bill (PPC). A new unified property tax (ENFIA) replaced the “emergency property tax” in 2014. Overall, the property taxes increased from 0.8% of GDP in 2004 to 2.8% of GDP in 2016.
Despite the increased taxes, house prices declined at a slower rate from 2013 onwards. Even with the increase in taxes, residential property transactions have stabilised, albeit at a low level. That points to upside opportunity, if income expectations improve.
Recovery in Housing Market to be Gradual
After eight years of European financial support, Greece exited its third adjustment programme. The successful completion of the ESM programme is an important step towards normalisation and stability.
The economy grew in the third quarter of 2018 by 2.1% on an annual basis. In its Interim Report on Monetary Policy 2018, Bank of Greece revised upwards its growth forecast for 2019 to 2.3% driven by stronger business investment, exports and private consumption.
Despite the progress, the challenges for Greece remain significant. The recently approved Prespes agreement reshaped the political landscape. In DBRS’s view, SYRIZA’s minority government, after the resignation of the junior partner, could face challenges in the implementation of the pending reforms and privatisations. The second Enhanced Surveillance Report by the European Commission will be published at the end of February and its outcome, if positive, will activate the debt relief measures agreed in June 2018.
DBRS expects the recovery in the housing market to be gradual due to the tax-stretched Greek households, subdued mortgage lending, deteriorating demographics and the decline in disposable income.
The European Commission’s Living Conditions report in 2016, states that 28.2% of the Greek population spent 40% or more of their disposable income on housing – second highest in the European Union – when the EU average was only 11.1%. The pace of the recovery will rely on the improvement of the business climate, the fall in unemployment, the durability of growth and the simplification of the tax regime.
Greece is ranking poorly, 153th among 190 economies in terms of registering property and 39th in dealing with construction permits.
DBRS considers that simplification of the procedures related to real estate transactions, a stable taxation system and a potential reduction in the property tax could accelerate the recovery of the housing market.
