The starting point for our research was the realisation that on a cumulative basis, prices in the Greek residential real estate market have increased 14% above the growth rate estimated by our fundamental macroeconomic models. The search for the factors driving this substantial divergence between ‘actual’ and ‘fair value’ house price estimates led us to the conclusion that during the crisis years of the Greek economy, a significant gap was formed between supply and demand in the housing market that will be extremely difficult to bridge in the short to medium term.
Starting from the beginning, we are able to document that the developments in the residential housing market are fully in line with the sudden drop in Greek household disposable income as well as the steep and countercyclical increase in the taxation of real estate wealth. Yet, it is encouraging to see that the recent rally in housing prices has revived interest in more housing construction, although the process is at a very early stage.
So how do we qualify the imbalance between supply and demand? According to our estimates, construction activity in Greece peaked in 2005 with the issuance of 66,000 building permits that led to the construction of 195,000 housing units overall. Since then, we have witnessed a steep decline that has led to the construction of only 16,000 housing units per annum since 2012. The outcome of this process was that while in the decade between the 2001 and 2011 censuses, the residential housing stock increased by 917,000 units, in the following decade, between 2012 and 2021, we estimate that only 155,000 units were constructed. At the same time, between 2011 and 2021 the number of households formed increased by 197,000. Moreover, we need to add the extra 170,000 units used as short-term (Airbnb type) housing rentals to that figure.
The upshot of all the above is that the supply and demand imbalance driving the house price increases far above levels justified by the Greek macro fundamentals is nothing more than the difference between the 155,000 units of supply and the 367,000 units of demand (197,000 from household formation plus 170,000 from short-term rental). The result is the accumulation of a housing shortage of about 212,000 units that will be very difficult to satisfy over the short and medium term, despite the recovery in construction activity.