Greece’s government debt as a percentage
of GDP is the second highest in the world
and the highest in Europe.

Greece was well known as the first area in Europe where advanced early civilizations emerged, where most western philosophical and cultural traditions began, and as a birthplace of the Olympic Games. Its mythology has been an artistic inspiration for thousands of years. Now, however, talking about Greece means talking about the first country to bail out in the Eurozone, the country with the highest government debt (142 per cent of its GDP) in Europe, and the country that is at the edge of default. How did this happen and how did the crisis affect Greece’s property market?

The Greek Economic Odyssey: Bailout n.1

The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007, allowing the government to run large structural deficits. Public spending soared considerably and public sector wages almost doubled in the past ten years.

Then the world crisis started and heavily affected tourism and shipping, two of the country’s largest industries. Later, with the situation getting more dramatic, the government misreported its official economic statistics; an officially reported budget deficit of 3.7 per cent of national income was in fact almost 14 per cent, one of the highest in the world relative to GDP. Greece was downgraded by all three rating agencies to BB+, and Greek bond yields rose.

In May 2010, the European commission, the International Monetary Fund, and the European Central Bank (known as the Troika) agreed to lend Greece €110 billion. The reason it received the loan was that it had become too expensive for it to borrow money commercially. The Troika hoped that the loan would give Greece time to sort out its economy so that it would be able to borrow money commercially. But it was too late, and the Greek odyssey continues with the worst possible rating (CCC by S&P) — the same as countries like Cambodia and Lebanon. Greece decreased its budget deficit from 15.4 per cent to 10.5 per cent of its GDP in 2010, over the declared plan of 9.4 per cent of GDP.

The Greek Economic Odyssey: Bailout n.2

House prices have been falling for
a long time. Greeks hope it will
lure foreigners to their property market.

In July 2011, Eurozone leaders announced a second bailout for Athens involving an €109 billion of government money plus a substantial contribution from private sector bondholders in exchange for strict austerity measures. However, it didn’t persuade investors; many still believe that Greece is going to default anyway.

“I don’t see how Greece can eventually avoid some kind of default,” said Martin N. Baily, who served as chairman of the Council of Economic Advisers under the Clinton administration. “It’s hard to see how you can avoid the need to finance this over the next five to ten years.”

The BBC released all the possible scenarios of Greece’s future here.

Greek Properties before the World Crisis: Housing Boom and Garages

There was a housing boom in recent years in Greece, as in many other countries. In Greece, prices grew sharply after the 2004 Olympic Games held in Athens. The housing market peaked over three years ago, and since then, prices have been falling. The boom ended because of the global crisis, as it did in all other countries. Some properties have lost as much as 40 per cent of their value, while the residential home sales have dropped by 75 per cent. The important feature of the Greek housing market has always been illegal square footage in buildings. All ground floors are declared as garages, although they are built like a separate apartment for tourists spending holidays in Greece.

The Real Estate Sector: Another Greek Tragedy

Permits issued for dwelling in Greece
are among the lowest among
OECD countries.

The Greek government, which needs every cent possible, allowed Greeks to legalize “garages” into living apartments for a certain payment in 2010. If the owner wanted to sell his garage as a living apartment and thereby gain more money than selling a garage, he had to come up with the requested sum to legalize it.

Meanwhile, mortgage rates have increased and frozen the already weak mortgage market. Many construction companies have to face problems of money shortage, and international investors have become worried about investing in such a risky country.

Housing prices have started falling as a result. Constructions were postponed or even stopped because owners can’t sell already built properties and the government has established new rules rising builders‘ expenses. The number of permits issued for buildings is decreasing rapidly, and the austerity measures have introduced large property tax increases that are forcing Greeks to put their homes on the market. It is a great opportunity for international investors since the Greek coasts are still popular vacation destinations and are now very cheap.

In the second quarter of 2011, average house prices dropped again in Athens (down 6.71 per cent from the previous year) and Thessalonica (down 4.7 per cent), the most populous areas in the country. The average price of apartments fell by 4.5 per cent in the country.

Once, Greeks hoped that tourism (accounting for one fifth of the Greek economy) would help them to find a way to recovery, but it was hurt by rioting protesters and strikes. The next option is their housing market, with cheap buildings, beautiful and historic surroundings, and the seacoasts. However, while concerns about default are still so alive, there is no chance that foreigners will be hurry to invest.