Given the importance of housing to the economy, the literature analyzing the various factors that influence housing price formation is extensive. These factors relate to both supply and demand, and each of them can affect prices in different periods of time. In the long term, demographics, construction activity, financial and fiscal structure can have a decisive influence on real estate prices. Among demographic factors, for example, the birth rate and the average age of the population help shape the demand for housing.

In addition, financial (de)regulation that increases the supply of credit can create favorable conditions for expansion of construction activity and housing supply. The fiscal system is able to influence long-term investment decisions regarding home purchases through incentives. The case of Greece provides clear examples of both over the past two decades. The price boom from 1996 to 2005 occurred after a fundamental financial deregulation that allowed commercial banks to enter the mortgage market. Prior to this, the latter was limited to a few local financial institutions that were the exclusive providers of mortgages. Eventually, the limited supply of mortgages increased to meet the increased demand for credit.

On the other hand, the fiscal consolidation programs implemented by Greece after the eurozone debt crisis included a significant property tax burden, which significantly distorted incentives to own property and ultimately led to adverse demand shocks. The government’s recently introduced Golden Visa program, which allowed foreign capital to invest in the domestic housing market, is another example of a positive demand shock brought about by the new regulatory framework.

Although historically the forces that influence the supply and demand for housing have been almost exclusively related to public policy (either directly through tax policy or indirectly through financial regulation), in the most recent example, it was the market that created the innovation that affected overall demand. The advent of the sharing economy in the hospitality sector has brought increased revenue through short-term rentals of much of the housing stock in urban centers. Although this phenomenon is observed in the vast majority of European urban centers, it is even more pronounced in Greece. In particular, Athens, Thessaloniki and Heraklion are the cities with the highest number of houses offered by hosts as complete houses/apartments (as opposed to just a room in the property). The need to regulate the short-term rental market is obvious.

Another group of factors influencing the housing price trajectory over the longer term are macroeconomic variables. The most common concepts in the literature are such concepts as gross domestic product (GDP), tax and mortgage rates, interest rates, inflation and employment. Of course, there are marked differences between countries in the relative importance of each variable, reflecting the specifics of different markets. The model we develop in this study is based on this group of variables.

Our baseline forecast shows a slowdown in house price growth over the next two years in Athens and Thessaloniki.

Our baseline forecast shows a slowdown in house price growth over the next two years in Athens and Thessaloniki. We forecast that a price cap of 12.7% (annual change) was already in place in the third quarter of 2022 and is expected to gradually decrease to around 4.3% by the third quarter of 2024. Given the large amount of research highlighting the link between house prices and the business cycle, this slowdown could be seen as welcome. This fact is justified in order to bring prices closer to the fundamental drivers of the economy and to avoid the decoupling of growth rates that can lead to “bubble” situations. However, the data points to a higher likelihood of a surprise increase in house prices over the next two years.

To begin with, unemployment, which is projected to continue to decline, is one of the strongest forces in our view and could boost demand significantly. In addition, the government recently announced a subsidized housing loan program for low-income young people. While this alone may not be enough to stimulate demand, the effect, combined with the reduction in unemployment, the Golden Visa program and this proposal, could be significant. The OECD recently warned that “experience across countries shows that fiscal subsidies for mortgage interest costs can push up home prices when new supply is limited, thereby limiting access to home ownership.” Indeed, if building permits issued are taken as a measure of change in the short-term housing stock, this number remains quite low compared to pre-crisis levels. The government’s social housing plan (My Home) mentions specific policy measures to encourage the renovation of vacant homes, but these are expected to go to the rental market rather than for sale.

Overall, while measures are being taken in the right direction, we believe that a careful study of supply and demand dynamics in the housing market is needed to ensure that interventions are proportionately directed between the two.

Mr. Stavros D. Malkidis is an economist working in the financial sector in London. What is written in the article clearly echoes the views of the author.

Mr. Theodoros Panagiotidis is a professor at the Faculty of Economic Sciences at the University of Macedonia.