The Housing Bubble in Greece

As is the case in most European countries, during the last ten years, housing prices in urban areas of Greece have increased by about 10% annually. This phenomenon was particularly exaggerated during the period 2005-2006, while the number of property transactions and the rate of new constructions recorded were higher than ever. This pattern is generally attributed to the financial liberalisation, the mortgage market development, and the fall in credit interest rates. State policies have undoubtedly played a major role. Furthermore, financial liquidity has largely resulted to the high prevalence of underground economy and money laundering, which is carried out via real estate ñ something that has been helped by Greek legislation and banking practices. Moreover, in addition to the large tax advantages for housing applied in Greece for a long time, state agencies anticipated the announcement of the date of imposition of VAT on new constructions and the increase in taxes in property transactions in 2006. These proposals were exaggerated and highlighted by the media and also by professionals, such as real estate agents, construction companies and banks. This government policy has led to serious economic inefficiencies, by drawing excessive resources into residential and second home constructions. In this paper, some theoretical issues about market inefficiency are discussed, based on the case study of the Greek housing bubble.