Explaining house price changes in Greece

Abstract

This article develops an equilibrium model for the Greek housing market that incorporates both macroeconomic and country-specific variables that affect demand for and supply of houses. In the overall upward phase of the 26-year period examined (1985Q1–2010Q4), our investigation of short-term fluctuations in real house prices and stock prices confirms the inverse relationship between movements in the housing price index and the stock exchange general index, identifies the direction of causality as running from the financial sector to the real sector and finds that, following an exogenous shock, reversion to the long-run equilibrium is a rather slow process. Furthermore, we identify a fundamental shift in the behaviour of Greek homeowners, who appear to be moving away from the treatment of housing as consumption good, towards treating house purchases as investment.

Keywords:

• house price changes
• construction costs
• housing price index

JEL Classification::

• R21
• R31
• E31
• H31

Acknowledgements

We are especially grateful to Chinmoy Ghosh, Osama Khan, Josie Oakley, Lai Van Son, Prodromos Vlamis and two anonymous referees for stimulating comments. We would like to thank meeting participants of the European Financial Management Association (EFMA 2009) in Milan for helpful comments on earlier version of this paper.

Notes

¹ In a 2001 article in The Washington Post, the then President of the Athens Stock Exchange, P. Alexakis, points out that some of the Greeks who invested in the stock market for the first time when they saw prices soaring in 1999 did so mortgaging or selling property to raise the funds.

² Glaeser et al. (2008) predicts that places with more elastic housing supply have fewer and shorter bubbles with smaller price increases. A number of more elastic places experienced large price booms, but as their model suggests, these booms seem to have been quite short.

³ In 2008, Greek household wealth consisted of real estate (81.8%), savings (17%) and stock (1.2%), while the homeownership rate, at 80.1%, was the second highest in the EU (Hardouvelis, 2009).

⁴ Case and Shiller (2003) indicate that elements of a speculative bubble in single-family home prices – the strong investment motive, the high expectations of future price increases and the strong influence of word-of-mouth discussion – exist in some cities. The consequences of such a fall in home prices would be severe for some homeowners. Given the high average level of personal debt relative to personal income, an increase in bankruptcies is likely. Such an increase could potentially worsen consumer confidence, creating a renewed interest in replenishing savings.

⁵ Wealth effects, income effects and effects through financial markets.

⁶ Beltratti and Morana (2010) indicate bidirectional linkage between real housing prices and macroeconomic developments, with investment showing in general a stronger reaction than consumption and output to housing price shocks.

⁷ Case and Shiller (1988) report that in the absence of severe economic decline the house prices prove to be inflexible downwards. Combined with upward volatility, this inflexibility produces a ratcheting effect with complicated distributional consequences.

⁸ Ghicas et al. (2000) search the valuation of IPOs in the construction industry and report that construction companies managed to raise capital and fund their investments through Athens Stock Exchange. Karousos and Vlamis (2008) indicate that the domestic and global macroenvironment have a substantial effect to the market participants in the Greek construction sector. Specifically the ability of the Greek construction companies to take advantage of the constantly changing domestic and global macroenvironment significantly affects their future viability and success. Benos et al. (2010) reveal positive relationship between construction activity and economic growth.

⁹ National Bank of Greece (2006) has estimated that Real Estate has long been one of the pillars of economic growth in Greece. Residential investment activity, combined with the effect of housing wealth on consumption, has provided about 1.3 percentage points to annual GDP growth during 2000–2005. Household wealth held in residential estate has been valued to be in the range of 6½ times GDP (4.9 times the revised GDP figure for 2006), compared with 4½ times GDP for the euro area as a whole, and private residential investment comprises about 39% of gross fixed capital formation – a far larger share than that for the euro area average (28%).