The new challenges that households face in relation to high inflation and the pressures they face in Disposable income The forthcoming increase in interest rates by the European Central Bank (ECB) as well as increases in property prices are at the heart of every household’s budget.
In Bank of Greece (BoG) Financial Stability Report gives answers to a number of issues that concern households and assesses the real risk for a number of sub-issues, taking a look back from 2021 to today.
Interest rate risk for households
Mortgage rates are expected to remain low for the whole of 2022, with only a small effect on the cost of servicing household debt.
Extremely low lending rates have made it easier for households to meet their debt obligations in 2021 and to avoid negative effects on the stability of the financial system. Interest expense as a percentage of gross disposable household income fell further due to lower mortgage and consumer loan balances, but also the reduction of interest costs on mortgages. During the first quarter of 2022, the weighted average interest rate of all existing loans remained almost unchanged at 3.5%, according to the BoG.
In particular, the average interest rate on existing mortgage balances over five years and the corresponding interest rates on consumer and other loans to individuals and private non-profit institutions remained virtually unchanged at 1.9% and 6.3% respectively.
According to the BoG, the easing of the easing direction of the Eurosystem’s monetary policy is expected in the medium term, taking into account the recent escalation of inflationary pressures. However, mortgage rates are expected to remain low for the whole of 2022, with only a small effect on the cost of servicing household debt.
Income risk for households
Disposable income will be challenged in 2022 however, there are factors that still have a positive impact.
The evolution of disposable income of households is a key determinant of the relative ease of servicing their loan obligations. According to provisional data from ELSTAT, gross disposable income rose from 118.7 billion euros in 2020 to 125.6 billion euros in 2021, an increase of 5.8%. It is noted that household income was boosted by fiscal measures to address the pandemic, totaling about 2 billion euros for 2021, which also helped protect employment and reduce unemployment.
According to the BoG, Real Gross Domestic Product (GDP) increased by 8.3% in 2021 compared to the previous year, offsetting much of the sharp decline observed in 2020. Household final consumption expenditure increased significantly by 8.9% for 2021 in relation to 2020. The unemployment rate fell significantly from 16.3% in 2020 to 14.7% in 2021, with employment prospects remaining positive mainly due to the lifting of restrictions and the gradual return to normal operation of businesses. Household income support is also reflected in the increase in deposits observed in 2021, albeit at a slower pace compared to 2020.
Regarding the pressures on household income, the harmonized index of consumer prices (HICP) recorded a positive growth rate and stood at 0.6% in 2021 after the decline in 2020 (-1.3%). In addition, since the beginning of 2022 there has been a resurgence of inflation (increase by 9.1% in April 2022 compared to April 2021) due to significant increases in food prices, transport and energy costs, but also disruption of global supply chains. Russia’s recent invasion of Ukraine has exacerbated inflationary pressures through rising energy prices and the spread of price increases on all goods and services.. Overall, it is becoming clear that for 2022, household disposable income will be challenged by the withdrawal of most fiscal support measures, inflationary pressures and geopolitical developments that cause uncertainty in consumer and investment decisions. However, the BoG estimates that there are factors that continue to have a positive impact, which is reflected in the growth rate of the Greek economy projected for 2022 and the strengthening of employment by the resilience of individual sectors, such as construction activity and exports.
Risk of house prices
Expectations for the Greek real estate market remain positive and prices are still far from the historically high.
The growth rate of apartment prices accelerated in 2021 to 7.1% on an annual basis, compared to 4.5% in 2020. In fact, in the fourth quarter of 2021 the prices of apartments for the whole country increased by 9.1% compared to the corresponding quarter of 2020. For 2021, the highest annual rate of price increase is presented by the newly built apartments compared to the old ones, where increases of 7.4% and 6.9% were recorded, respectively. The analysis of the data by geographical area shows that the largest increase was recorded, for the whole of 2021, in Athens (9.1%).
According to the BoG, despite the instability of the last two years, as a result of the pandemic and the recent increase in energy costs, construction costs and the effects of the war in Ukraine, the expectations for the Greek real estate market remain positive. On the one hand, the emerging very good course of tourism and on the other hand, the prospect of alleviating geopolitical instability in a reasonable period of time, maintain the positive medium-term and long-term expectations, which is reflected in the values ​​and the relatively low returns of real estate income. Although the European Commission’s recommendation to restrict residence permits for investors (gold visa or gold passport) may have a partial effect on demand, it is estimated that investment interest will remain strong especially for certain privileged positions in the basin. Attica and in areas with tourist characteristics. In addition, it is pointed out that prices are still significantly different from the historical high recorded before the financial crisis.
Based on the apartment price index compiled by the Bank of Greece for the whole country, The highest value of the index was observed in the year 2008 (101.7) and then followed a steady downward trend, to record the lowest price in 2017 (59). Since then, the apartment price index has been steadily rising, reaching 72.1 in 2021.
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