Real Estate Market is Back on Track

Real estate is regaining investor interest. But risks, mainly from the external environment and from the ability of banks to reduce the stock of non-performing loans (NPLs), may weigh negatively on the anticipated growth, says Theodoros Mitrakos, Deputy Governor of the Bank of Greece.

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GIG: How is the residential housing market performing? What is the outlook for the sector?

Mitrakos: Following nine consecutive years of declining prices, during which the index of apartment prices recorded a cumulative decrease since 2008 of 42.0%, the residential property market showed signs of gradual stabilisation and improvement in 2018 and 2019.

In 2018, apartment prices increased at an accelerating pace in individual quarters, recording an average annual rate of 1.8%. The trend continued in the first half of 2019, with the latest (provisional) residential property data indicating that nominal apartment prices increased by 7.2% year-on-year (y-o-y).

Although a stronger expansion was recorded again in the two major urban centres (Athens and Thessaloniki), there are also signs of a more broad-based improvement, which is eventually expected to penetrate and diffuse to lower specification market segments.The dynamics of the market, especially in the Attica region, are also reflected in the number and volume of building permits for new dwellings (growth rates of 59.3% and 43.2% y-o-y respectively in the ten months of 2019), while on a countrywide basis, investment in residential property increased by 9.8% y-o-y in the nine months of 2019 (against 12.5% in the same period of 2018). Note also that the rising interest for investment in residential property, mainly driven by the development of the short-term lease market (e.g. Airbnb) and the Golden Visa programme, is reflected partially in the 55.1% y-o-y increase of the net capital inflows to domestic real estate by foreign investors in the nine months of 2019.

The positive outlook of the Greek economy, the improvement in households’ disposable income, the rising of consumer confidence, and the further progress in the management of NPLs are expected to exert a positive impact on internal demand and subsequently mortgage lending. Needless to say, a positive boost will come from the implementation of a series of reforms, necessary to ensure a more investment-friendly environment. Finally, the recent suspension of Value Added Tax (VAT) on new constructions for three years and the reduction in property capital value taxation are expected to have a positive impact on the real estate market.

GIG: Banks have been gathering properties at a fast pace as they race to reduce bad loans. This stock of assets potentially represents a huge spike in supply levels. Is this a threat to the recovery in housing prices?

Mitrakos: The efficient management of NPLs is of utmost importance for banking sector stability, economic development, and social cohesion since it not only improves the financial soundness of banks but also frees up funds and resources to be directed to other, more productive sectors of the economy, resulting in higher productivity and output growth.

The establishment of a secondary NPL market and of an e-auction platform during the last few years, coupled with the recent streamlining of the protection of primary residence, provide favourable conditions for the efficient resolution of NPLs backed by residential collateral. Meanwhile, the four systemic Greek banks have already set up specialised units for the management of real estate owned (REO) assets and their disposal to end investors. In 2020, banks will pursue securitisations of mortgage NPLs as well as bulk sales of residential real estate.

In this light, the pressure on the prices, if any, from banks’ activities related to the management of nonperforming mortgage loans should be short-lived.

On the contrary, the gradual recovery of residential property prices will support pent-up demand and facilitate the restructuring of NPLs. This will feed back into real estate investment (to upgrade the devalued stock) and increase loan disbursements thanks to the reduction of credit risk and the enhancement of the value of collateral. Hence, a positive feedback loop will emerge in the medium term.

GIG: What do you identify as being the key risks to growth in the real estate market?

Mitrakos: The key downside risks to the Greek real estate market comprise a lower-than-anticipated GDP growth rate and a slower-than-anticipated recovery of bank lending to households. Macroeconomic risks mainly stem from the external front, related to a possible further slowdown of global economic activity amid fears for trade protectionism, geopolitical risks, and vulnerabilities in emerging market economies. Regarding credit availability, the marked improvement in the liquidity position of banks in the course of 2018 and 2019 paves the way for a gradual recovery of mortgage lending, albeit from an extremely low level.

Lastly, the sustainability of the recovery of the Greek residential market is also subject to the implementation of a series of reforms, necessary to ensure a more investment-friendly environment, including acceleration of the administration of justice, simplification of planning processes and permit issuance, reduction of red tape, rationalisation of the land use framework, etc.

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