by admin The current economic situation, but sometimes an entire period of history, can be captured by the price fluctuations of a small apartment. A friend of mine was described me a few days ago the adventures and destiny of a small apartment she owns in Ampelokipoi over the last 20 years. The ground-floor apartment, which her family bought her during her student years up until the day she got marriage, became passed to her full ownership around 2000. In the early 2000s, he had no trouble renting it out for business accommodation to an individual who offered social counseling services. At the beginning of the next decade, shortly after the 2010 bankruptcy and during the financial crisis, the regular payment of her rents was disrupted and the space was vacated. At that time, the price of the property in the area had fallen steeply, in some cases close to the level of a mid-value car, i.e. around 15,000-20,000 euros; however, as she was not in any debt, she had no reason to sell the propery, despite the frequent tax charges (such as ENFIA) that were first introduced by the government around that time. In 2016, an NGO requested the property for long-term lease in order to host refugees for the time they remained in Greece for processing bureaucratic issues regarding asylum and residence permits. The first NGO was succeeded by another one and in 2022 the property was again used as a hotel. Ever since, due to aging and damaging, the property now needs a renovation costing roughly 20,000 euros; due to this cost, the owner decided to sell it instead. She assigned the apartment to a real estate agency and the first offers she received were around 65,000-70,000 euros, which was three times the property’s original value a decade ago. In this amount, one needs to add the cost of renovation that the potential buyer would need to consider along with his offer. The most interesting thing, however, was that one of the potential buyers was a foreign national, who was planning to obtain a “Golden Visa” permit in order to stay in the country and move around in the EU. His plan was to purchase three or four similar properties. From this specific course of a small apartment near the center of Athens, one can draw useful conclusions about the country’s political and economic situation and the Western economies in general.
The bigger picture
Compared to other European countries, real estate prices in Greece remain competitive and undoubtedly, during the last 10-15 years have offered significant speculative returns. The above example, where within a decade the price of an ordinary apartment has more than doubled, is typical. In most European and US capitals, real estate prices have skyrocketed and housing has become an issue. A key factor responsible for the price boom is the loose monetary and fiscal policies gradually followed by more and more governments and central banks after 2000. These policies have created an inflationary impact, which first affected stocks and real estate. Consumption lagged due to deflationary pressures, globalisation and migration flows.
Apart from monetary and fiscal policies, however, there are a few other factors that have contributed to rising real estate prices:
1. Short-term rental platforms, such as Airbnb, are absorbing many properties from long-term rentals. In doing so, they increase demand and decrease supply, which result to raising prices.
2. Refugee and immigration flows increase the demand for low-value properties.
3. The introduction of the “Golden Visa” scheme, where someone with a few hundred thousand euros can obtain a residence permit in the EU, is affecting the real estate market, but not only in Greece.
4. The arrival of remote workers and digital nomads increases the demand for rental properties.
On the other hand, free land for building new properties in the urban areas are limited. The are also empty properties, which relate to ownership documentation problems, where decisions cannot be easily made. Many governments in the Western World are about to introduce regulations such, as rental price freezing, in order to alleviate the housing problems. This is wrong as it will reduce investments in new housing and exacerbate the problem. The real solution is to define new housing development areas, with transport infrastructure, and to deal with the complexities where property owners are many (in terms of economic benefit) and unable to decide together for their real estate.
The course of real estate prices in the coming years will depend on the general course of the economy, Greek and global. If there is a deep recession soon, then the real estate bubble will explode. If inflation continues to gallop, property prices will continue to gallop as well. Our assessment converges with the view that inflation is not a transitory phenomenon and will only be tamed by a deep and long-lasting recession. The de-escalation observed in recent months should probably be considered as temporary. It looks like a probable correction of the first bullish wave of the market, which will be followed by more corrections. The most probable scenario is that once governments and central banks realise that the global economy is sinking into recession and that markets are collapsing, they will react convulsively and aggressively with new negative interest rates and quantitative easing programs. This will skyrocket property prices, which will have corrected their course somewhat earlier, but also stock prices etc. Then, governments and central bank will take even more aggressive inflation-control measures, causing another recession. As we have written before, the inflationary pressures of recent years are multifactoral and take several years to tame, as they did after 1980. Back then, the inflationary pressures were tamed by the rise of globalisation and by deflationary cheap imports in the West.
The next taming period will probably come from the generalised use of automation in production. Production for Western consumption will move from Asia back to the West and most of it will be automated, which will reduce labour costs. The broad use of automation will logically be the next cause of deflation in the West. This scenario does not seem possible to reach its critical moment until a decade or so from today. So, if someone asks me how will stocks and real estate do, the answer would be “sharp up and down swings, for which what we have already experienced during the last 30 years, will not be comparable.
P.S. When the salary earned by someone who works for the very first time in Greece is between 650 and 700 euros, which means that this person needs more than half of his salary for rent, then it is clear that the country is going through a price-bubble in real estate. Just because the situation is worse in many other cities abroad, that does not mean that the current increasing real estate prices are reasonable.
Source: Costas Stoupas, 6/4/2023
https://www.capital.gr/o-kostas-stoupas-grafei/3708451/i-fouska-ton-akiniton/