Alpha Bank: The impact of the Ukraine war on the real estate market

The course of the construction activity and the real estate market in the inflationary environment formed by the war in Ukraine is analyzed by Alpha Bank in the Bulletin of Economic Developments that it published today.

“The real estate market and construction activity seem to have been affected to a lesser extent compared to most sectors of the Greek economy by the pandemic crisis, while their performance in 2021 was particularly good,” notes the bank’s Financial Studies Directorate.

As he states, “the construction recovery in 2021 was strongwith the Gross Value Added (GVA) of the sector having increased by 10.3% compared to 2020.

It is noted that, in 2020, despite the pandemic crisis, the APA of constructions fell by only 1.2% and, in fact, after the strong increases of the two years 2018-2019, by 7.6% and 8.4%, respectively. Particularly significant was the increase of private construction activity in terms of volume (cubic meters) -according to the new building permits-, which marked an impressive increase compared to the previous year, by 45.9% (Graph 1).

At the same time, according to the data published by the Bank of Greece, last week, residential property prices increased by 9.1% on an annual basis, in the fourth quarter of 2021, while, in total in 2021, the increase amounted to 7, 1%. In addition, foreign direct investment in housing increased by 35% in the nine months of January-September 2021, on an annual basis, compared to a decline of 43% in the same period last year.

Russia’s invasion of Ukraine late last month has intensifies inflationary pressuresprimarily in energy and food products (see Weekly Bulletin of Economic Developments 10.3.2021, 23.03.2021) and, therefore, is expected to lead to a slowdown in the recovery of economies, globally, in the post-pandemic era.

Regarding the construction sector and the real estate market in Greece, the consequences of the war in Ukraine are expected through:

Firstly, the possible postponement of the implementation of investment plans and foreign direct investment, due to the prevailing uncertainty, a development that compresses the supply of housing in the medium term.

Secondly, the rise in prices of construction materials and energy costs and the possible transfer of part of it to house prices.

Third, in the event of prolonged inflationary pressures, by turning investors away from securities into real estate, in order to protect themselves from the fear of strong inflation.

The above three factors may slow down, but will hardly halt the upward trend in construction activity, while acting rather on rising real estate prices.

In this Bulletin we present the latest available data on the upward trend of the real estate and construction market in Greece, as well as on the expectations of entrepreneurs in the construction sector and we attempt to record the factors related to geopolitical developments that may slow down growth. of that sector.

Real estate prices and private construction activity

More specifically, as shown in Graph 1, residential property prices have increased by 20% cumulatively in the last three years, with the increase being more pronounced for new apartments, up to 5 years old (21.5%), compared to old ones (19 , 2%). In addition, prices rose at a higher rate in major urban centers. Specifically, in 2021, residential property prices increased, compared to 2020, by 9.1% in Athens and by 6.9% in Thessaloniki, while in other major cities and other areas the increases amounted to 5, 4% and 4.6%, respectively.

At the same time, the private construction activity, based on the volume, moved strongly upwards, from 2017 onwards, marking in 2021 the best performance since 2010. The turnover of the construction sector last year amounted to Euro 7.4 billion, compared to Euro 6.8 billion in 2020, and Euro 7.2 billion in 2019. The decline in construction turnover in the first year of the pandemic (-5.2% on an annual basis) was limited compared to others sectors that suffered significant losses, such as accommodation and catering services (-61%), transport and storage (-25.3%), manufacturing (-11.1%) and wholesale and retail trade (-7%) , 2%).

As can be seen in Graph 2, the turnover of the individual construction sectors, ie the construction of buildings (which basically include private constructions) and the civil engineering works (which concern mainly public constructions), moved upwards, in 2021. Specifically The turnover of construction of buildings increased by 14.9%, during the previous year, compared to an annual increase of 4.4% in 2020, exceeding the corresponding size of 2019 by about 20%. Civil engineering projects, respectively, in terms of turnover, increased by 3.3% in 2021, while the annual decline they had recorded, in 2020, reached 10.7%.

Business expectations in the construction sector and rising prices of construction materials

Business expectations in private construction (construction of buildings) moved sharply downwards, during the first months of the pandemic, while then they improved and passed into positive territory, the last four months of 2021 (Graph 2). In March 2022, this index stood at 6 points, significantly improved compared to January (-10 points), but also in February (4 points). Business expectations in public construction (civil engineering projects) also moved upwards, during 2021, but returned to negative ground, from November 2021 onwards, reaching -10 points in March 2022, slightly improved, however, compared to February (-14 points).

Regarding the expectations of the entrepreneurs in the construction sector, both private and public, for the evolution of the prices of the construction projects in the next quarter, they are increasing (Graph 3). Specifically, the index of private construction rose to 16 points in March 2022, from 25 points in February – despite the Russian invasion of Ukraine – and from -1 points in March 2021. Respectively, the index of public construction was formed , this month, at 29 points, compared to 52 points in February and 13 points in the same month last year. In addition, the percentage of entrepreneurs who estimate that shortages of material and / or equipment will limit private construction activity has increased significantly, from May 2021 onwards. In March 2022, the relevant index stood at 13 points, while, from 2019 until April last year, the average value of the index was almost equal to one point (red dashed line, Graph 3). The increase in the prices of construction materials is reflected in the relevant index of ELSTAT, which follows an upward trajectory, from January 2021 onwards. Specifically, the Price Index of Materials for Construction of New Residential Buildings increased by 9%, on an annual basis, in February 2022, while, in the previous three months, the annual increase exceeded 7%. Of the sub-categories of the index, the largest annual increases were recorded in February by the following: diesel, electricity, water (44.6%), basic processing metal materials (13.7%), electrical materials (12, 6%) and artificial stony materials (11.5%).

The extent to which the war in Ukraine will affect the Greek real estate market will depend to a large extent on its duration. Inflationary pressures related to recent geopolitical developments have already increased the costs of construction companies and are expected to squeeze their profits, while part of the increased costs may be passed on to the prices of new homes.

In addition, consumer price inflation could erode household wealth, turning them into real estate investments to protect the savings accumulated during the pandemic crisis (Euro 19.1 billion, from March 2020). , until December 2021). This can maintain the momentum of the real estate market, as inflation can act as a “wealth storage tool”. On the other hand, the rise in prices, along with the abolition of support measures to address the negative effects of the pandemic, which was one of the factors in the accumulation of deposits, may lead to a reduction in savings to cover increased living costs and consumer needs.

See the full Bulletin in the right hand column Related Files