Construction worries as prices stay put, transactions decline
Kathimerini 12 May 2008

One of the pillars of strong Greek economic growth since the late 1990s, the construction business, is not doing well according to data and various people working in the sector, raising concerns about its impact on other related sectors and the country’s economy in the quarters ahead.

Much depends on the course of the local residential market, which has been sending signs of greater fatigue for quite some time.

According to civil engineers, architects, workers and others active in the private construction sector, things are not looking good. Of course, it is not the first time in the last eight years or so of booming business that these professionals have expressed concerns about the conditions in their industry. Many had done so in the months leading up to the Summer Olympics in Athens in 2004, when they feared a severe slowdown which never materialized.

This time though things look a bit different because they are backed by disappointing figures and an international credit crisis spreading into different European markets, such as the UK, Spain and Ireland.

According to the National Statistics Service (NSS), construction activity fell by 13.4 percent year-on-year in the January-February period based on new building permits issued, and by 2.5 percent in terms of volume measured in cubic meters.

Private construction activity, which constitutes the bulk of total construction, fell by similar percentages. But the fate of construction is to a large extent tied to the status of the residential real estate market. Although no official statistics are available, the residential market is widely thought to account for 80 percent or more of the Greek real estate industry.

The balance is split between retail, office, logistics, hotel and other sub-sectors. The value of residential real estate is estimated at more than 700 billion euros and is believed to account for more than 80 percent of Greek household wealth.

One would expect industry executives, advisers and agents to agree on the current status of the markets. However, it is easier to find consensus between supporters of Greece’s top soccer teams than among them. This is no surprise, given the fact that it is a fragmented market with different trends prevailing even in neighboring districts of the same city.

House surplus

The stock of unsold houses is an example. According to a handful of real estate agents and advisers, there are some 400,000 unsold apartments and other houses throughout Greece, a high number by any standard.

Still, the large majority puts them at 100,000 units or less. It should be noted that the surplus is not the result of weak demand but the rush of many construction companies to obtain building permits in the second half of 2005 and erect houses before the introduction of the unpopular VAT (value-added tax) on new houses which made them more expensive.

In reality, all these are rough estimates and nobody knows the exact number of unsold houses.

However, this example highlights the sharp differences of opinion in the industry. Judging from the signs of new houses for sale in some Athenian suburbs, one would side with the pessimists, but just looking at the center or other areas one can easily conclude things are not so bad.

Impact on buyers

Still, these numbers, in conjunction with the news of the slump in foreign real estate markets, with record foreclosures and the sharp drop in selling prices of houses, appear to have had an adverse impact on the psychology of potential Greek buyers.

The fact that banks have become more selective and cautious in lending, along with the increases in interest rates, has also caught the attention of the local media and consequently the individuals interested in buying a house.

Most banks no longer advertise special mortgage offers, which until recently included below-market introductory lending rates for the first few years of the mortgage loan, to lure customers and/or offer to pay various expenses.

At this point, most new mortgage loans for 15 to 20 years or longer carry an interest rate in excess of 5.5 percent, according to senior bankers specializing in retail banking.

One could also add worsening labor and incomes conditions but this theory is not supported by facts. The pay of the average Greek employee in the private sector is projected to rise by more than inflation again this year and there are no signs that employment will stop growing. This means the disposable income of the average Greek worker will go up after adjusting for inflation.

Moreover, the vast majority of Greek buyers think they are being asked to pay too much when they want to buy an apartment or a detached family house.

This is one of the reasons half or more of the buyers have switched to more affordable used apartments rather than brand-new ones in the last six months or more, according to the data of some of Greece’s largest real estate brokerages.

However expensive, a top apartment in a prime area of Athens cannot fetch the 36,825 euros per square meter asked in London at the end of 2007 or the 35,000-euro tag in France’s Courchevel or the 32,500 euros per square meter in Monaco.

Still, the majority of the Greek population appear to have become more pessimistic in assessing the impact of the global credit and housing crisis on the local residential real estate industry.

This translates into broadly steady prices since the start of the year and a lower volume of transactions compared to the same period in the previous two years.

Whether the dent in psychology can translate into a protracted stagnation as argued by some industry officials or a blip in an otherwise upward trend remains to be seen.

A lot will depend on general macroeconomic conditions, where there is a two-way interaction between the residential property market and construction on the one hand and economic growth on the other.