The Rise, Fall and Revival of the Residential Property Market in Greece: Bringing New Drivers of House Price Fluctuations to the Foreground

Over the last two years, the Greek residential property market has clearly re-entered an upwards course. The recovery dynamics in house prices accelerated further in the first nine months of 2019, with house prices rising by 7.4% y-o-y, creating equity gains for post-crisis investors and offsetting a small part of the excessive losses incurred during the previous decade. A breakdown of the index by region reveals that house prices in Athens lead the way in the current recovery, increasing by 10.3% y-o-y in the first nine months of 2019, on the back of the rapid expansion of the short-term rental market through the home-sharing economy and the Golden Visa programme. Furthermore, residential investment embarked on an upward trend for the first time in 2018 after almost a decade of consecutive declines, along with the remarkable increase of net capital inflows from abroad for property purchases in Greece. <br><br>A better understanding of the current market recovery path and its future direction presupposes some empirically-driven conclusions from the historical market mechanics as well as the fresh technological and policy challenges. In particular, an assessment of the nexus between macroeconomic conditions and the real estate market in the recent historical perspective may start by dividing the timespan of available house price series into three main phases; boom, bust and recovery. <br><br>The above EU-average growth in economic activity during the ‘90s and ‘00s along with the financial liberalization and the adoption of the euro - which rendered borrowing for buying a house convenient - led to a buoyant rise in housing demand. Given that supply needs a long time interval to meet demand, real estate prices went on dramatically increasing. The boom phase stopped with the global economic meltdown. During the “bust” phase of the real estate price cycle, the house price index dropped cumulatively by 42.4% from its peak in Q3 2008 until the trough in Q3 2017 (Graph 1). However, from Q4 2017 onwards, the Greek housing market shows signs of recovery, with house prices increasing cumulatively by 11.5% until Q3 2019, offsetting a small part of the large losses incurred during the recession. <br><br>During the third phase, the observed revival in the Greek residential property market is in line with the mild recovery of economic activity, with real GDP recording positive annual growth rates for ten consecutive quarters. Although business and house price cycles are both now in an upturn phase, housing loan growth remains negative, albeit relatively stable. Consequently, although in the period before the financial crisis mortgage credit growth supported the strong expansion of the house price cycle, the recent recovery dynamics might be broadly characterized as “credit-less”. The strong upward dynamics prevailing in the current phase of the house price cycle imply significant gains for the Greek economy. First, rising house prices improve the value of collaterals and the capital position of banks via the rise in the value of their own real estate assets and/or their positive effect on non-performing portfolios. Second, there are significant gains for household wealth, taking into account the high homeownership ratio in Greece. Thus, in accordance to the life-cycle framework, higher property prices stimulate economic activity through wealth effects, enhancing investment and private consumption (Aladangady, 2017). <br><br>The current issue of Insights aims to analyse what causes real estate price fluctuations in Greece and shed light on the newly emergent macro- and micro-economic factors that contribute to the recent sharp acceleration of the house prices growth rate and the revival of the residential property market in Greece. <br><br>The rest of this Insights is organized as follows. Sections 2.1 and 2.2 provide a historical background and summarize some key stylized facts that characterize the Greek housing market emphasizing on its interaction with the developments in the domestic banking system. In Section 2.3 we present a short literature review of the determinants of residential property prices, focusing mainly on the demand-side factors. Sections 2.4 and 2.5 briefly discuss some key recent developments of property taxation in Greece and the regime switch during the crisis towards higher recurrent taxes on immovable property and lower taxes on property transactions as well as the evolution of homeownership over time and relative to other EU countries. Sections 3.1 and 3.2 shed light on the synchronization of the business and credit cycle with the house price cycle and the role of additional factors in the current revival of the domestic real estate market, while Section 3.3 evaluates the current phase of the house price cycle in terms of households’ affordability and envisaged profitability by market participants. Section 4 concludes.