Saturday, December 9, 2017

Greek Residential Real Estate Construction

Just one chart today (ok, three ;) - the complete evaporation of new home building in Greece. 

Top to bottom the annual value of new home construction collapsed 25 billion euro, going from 26 billion per year in 2007 to just 1 billion in 2016. That's a 95.5% collapse!

In the same period Greek annual GDP dropped 50 billion, from 225 billion to 175 billion.  In other words, an amazing 50% of the Greek Depression is due to the collapse in residential real estate construction.

Housing construction is a sub-component of gross capital formation (a.k.a. investment), itself one of the three main components of GDP : consumption, gross capital formation and trade balance. 

From the chart below it is easy to see what led the Greek economy into a tailspin: housing construction collapsed from an unsustainable high 11.2% of GDP to a likewise unsustainable low of 0.65%.

 Why do I say "unsustainable"? Because (a) in the "boom" years Greek population,  new household formation and external demand (e.g. foreigners buying vacation homes) did not rise nearly as fast as the new supply of homes and, (b) in the current "bust" years this natural demand must be rapidly absorbing the excess housing stock created in prior years.

Using the number of weddings taking place every year in Greece as a very rough guideline for new housing demand, we can see how the boom years created a housing bubble (marriages did not rise nearly as fast as construction), and why the bust may now be overdone (marriages have not fallen off as dramatically as construction). 

 My prediction is that housing construction will soon start rising again to more sustainable levels, boosting gross capital formation and - thus - GDP growth.

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