by Giorgos Kasotakis
20 Jan, 2023
The Greek financial crisis started in 2010 and bottomed out in 2015, with two elections and a referendum. Since 2015 and until today, Greece has recovered quite a bit, the economy has improved a lot and the economy has grown strongly. In addition to the economy as a whole, the real estate sector has also recovered significantly, with increasing demand from Greeks and even foreigners for apartments in cities and holiday homes or building projects on popular islands.
According to the Hellenic Statistical Service, in 2015 13,350 building permits were issued, in 2020 18,768 (a 40% increase in five years), and for 2022 the number of building permits is approaching 24,200. (Data for November and December 2022 are still missing). Thus, an 80% increase in the number of building permits for private projects in 7 years shows how strongly the real estate sector has supported the recovery of the Greek economy.
All of us in the construction industry were used to estimating construction projects with fixed prices. We had fixed prices in our minds and in our notes and during our discussions with clients we were able to come up with a very accurate estimate of construction costs from the beginning. It was also common for construction contracts not to include an inflation clause because it was not considered necessary. There was almost no volatility in the prices of building materials and if there was a change in the price of material, suppliers were able to lock in prices for current projects and only apply the new prices to future projects. From the beginning of 2021, steel and timber started to become more expensive and by the end of 2021, all suppliers continuously announced new higher prices. The year 2022 was a year where many expected prices to decrease, but then the war in Ukraine started and energy gave the last but very strong pressure on all prices. From 2020, the year of the pandemic, when demand was at its lowest point, to the beginning of 2023, total construction costs have increased by 20-25%. In 2021 the price increases were due to increases in material prices, but in 2022 labor costs also increased by 10% because of global inflation.
What is very important for the real estate sector in Crete is the fact that Crete is still very attractive compared to other Mediterranean holiday places, both in terms of construction costs and property prices.
Since the beginning of 2022, the US Federal Reserve has raised interest rates by around 4% and the European Central Bank by 2.5%. This means that mortgage rates have also risen, and property markets are under pressure for the first time in many years since the 2008 global financial crisis.
Mortgage rates in a country are linked to bond rates. Thus, during the golden age of zero interest rates in Europe and the Western world in general, mortgage rates were very low. Because of the zero interest rates, the real estate sector in Western countries has grown very strongly, and, in the opinion of many analysts, led to a bubble.
In contrast, this has not happened in Greece. In the period 2010-2015, when the real estate sector in Western countries was strongly upwardly trending, the prices in Greece had fallen by about 30% and banks were hardly lending for real estate.
Since 2015, the Greek real estate sector recovered, but without the help of loans, but with own capital. During the zero-interest rate period, mortgage rates from greek banks were comparatively very high, approaching 4% for apartments and detached houses.
After 2015 and even today, Greeks and foreigners who want to invest in Greece must do so with 100% equity for the investment to make sense. This disadvantaged position in which the Greek real estate market finds itself provides room for a realistic real estate price valuation compared to the rest of the Western real estate markets, as the highly leveraged markets are on the verge of bursting the bubble...A bubble that the Greek real estate market has never reached, and real estate prices remain at an affordable, realistic level.