The IMF points out "bubble" in Greek real estate prices

Greece’s property market appears to have entered bubble territory after a six-year price rally that began in 2017, the International Monetary Fund said in its Article IV report on Greece.

The fund is sounding the alarm on the Greek banking system, calling for action

When it comes to prices, the IMF believes there is a “limit” based on two main indicators it uses in its ad hoc analysis. On a housing price-to-income basis, Greek real estate exceeds the target by 6 basis points relative to the long-term average, as does overrated. At the same time, the revaluation based on the price-rent ratio is even greater – the gap reaches 29 points.

This problem began several years ago, but seems to have gotten worse in recent years. Residential property prices have increased significantly across all indices since their fall in 2017, exceeding 50% in nominal terms and 35% in real.

Demand

It is worth noting that, according to the fund, demand also came from non-residents who have significantly increased their investments in the real estate market, taking advantage, among other things, of the Golden Visa program, which appeared in addition to structural problems showing Greece as one from countries with the lowest number of rooms per person. However, supply has increased significantly, with residential property investment as a percentage of GDP and building permits doubling since 2016, although the initial base was low due to the severe crisis that began in Greece in 2009.

Risks

As the fund’s analysis shows, current real estate prices are a risk factor for the Greek banking system. While systemic risk is relatively limited, according to the IMF, as leverage is low in the private sector, it has increased since last year and the banking sector faces serious challenges to its future. While debt burdens on both corporations and households remain low compared to the eurozone average, the cost of servicing household debt is among the highest in the eurozone. At the same time, rising interest rates could further increase the cost of servicing household debt, causing banks to deteriorate in asset quality, making it more difficult for them to generate capital internally.

Macroeconomic risks associated with further fiscal tightening, coupled with slowing growth amid inflated house prices, could lead to a deterioration in bank balance sheets and a correction in house prices, triggering a vicious cycle of adverse interactions in the real economy, the IMF said.

Supervision

At the level of supervision of the banking sector, in order to prevent risks associated with the housing market, the fund recommends that the Bank of Greece use the tools at its disposal to study the business plans of banks and introduce lending restrictions in force in many European countries by adopting loan limits based on household income and the rate of financing of home purchases.

Additionally, household debt remains a problem in Greece, according to the fund. Most of the debts of Greek businesses and households are owed to financial institutions and the state, including overdue taxes and social security contributions.

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