Property prices in Greece are expected to keep falling in the coming years but this is making homes more affordable, according to the latest analysis of the Greek real estate market. Prices continued to fall in 2013 to reach a peak to current decline of 32.7% in the third quarter of last year, says the report from Fitch Ratings.

But it points out that recently, the Greek government implemented new initiatives to promote residential housing liquidity. The most notable is the decision to allow REITs beneficial tax treatment to hold residential properties of up to 25% of their total assets. But the actual impact of the new tax treatments remains uncertain.

Fitch expects a further fall in house prices in the coming years towards a total peak to trough decline of 42%. The Greek parliament extended the moratorium on foreclosures for another 12 months in December 2013 and this takes off some pressure on the additional supply to the housing market.

The report also points out that affordability for new housing transactions has improved as house prices have fallen further, supported by the prolonged low interest rate environment. As a result Fitch expects stable to improving affordability for the coming years.

‘The improving prospects for the Greek economy and the resulting increase in economic affordability may, however, be offset by the possible interest rate rises and the continued deleveraging of Greek banks. The Greek market is likely to remain dislocated in 2014 with low housing turnover and weak demand,’ the report explains.

When it comes to lending interest rates remain much lower compared to the pre-crisis period following the deep monetary expansion programmes initiated by the European Central Bank following the crisis.

‘Funding costs have therefore remained quite low for financial institutions and this has translated into lower mortgage rates for borrowers. Due to central bank support, Fitch does not expect interest rates to change much in the near term and believes mortgage rates will remain stable over 2014,’ it adds.

Also, it adds that the level of new arrears has begun to shrink as the economy begins to recover, however the overall volume of non-performing loans is expected to continue to increase as Fitch expects a slow orderly wind down of the foreclosure pipeline. Arrears should peak in 2015.

Overall mortgage lending levels are expected to remain flat. The level of new gross mortgage lending has reached a new low, driven by both supply and demand. On the supply side, Greek banks continue to deleverage, underwriting standards remain strict, and the competition among lenders has also remained at lower levels. On the demand side, mortgage applications remain at low levels as HPI continues to decline.

‘In line with the house price forecasts and credit availability for borrowers Fitch expects relatively flat lending volumes over the coming years. Borrowers incentives as well as their ability, to refinance is likely to be impaired due to a combination of lenders’ reduced access to financing, banks’ plans to deleverage and tighten lending criteria, rising default rates and declining house prices,’ the report concludes.