THE GREEK REAL ESTATE CRISIS WITH A FRUITY TWIST
Nick Dinos
(Studied Science and Finance at the University of Manitoba in Canada. He is now a registered Real Estate Broker and Property Manager on the island of Santorini in Greece)
Copyright: Nick Dinos on line (22 July 2008)
I was sitting at an open-air bar on the cliffs of Santorini this morning, just around the corner from my office, admiring the spectacular view of the Caldera and sipping on a fruity-fruit-punch cocktail thingy, which was laced with an inexcusable amount of alcohol for that hour of the day. While pretending to be doing some productive work on my PDA, I was secretly admiring the bikini-clad tourist girls who must have come to Santorini just to clad themselves in skimpy bikinis and walk around, so that they could drive me crazy. At that moment, the phone rang and knocked me out of my fanciful bliss, dropping me into a state of panic as I knew for sure that it was my wife calling me for more money; money I had spent sucking back fruity-fruit-punch thingies all morning.
Thankfully, it wasn’t my wife but rather a client who wanted to sell some real estate. What a surprise! Yet another client who wants to sell something! Isn’t there anyone out there who wants to buy something!? So I listened to his pathetic story about how he had to sell his land, which had been in the family for about a gazillion generations, because he really, really needed the money. I was trying hard to pay attention, adding a couple of “yes’s” and "uh huh's" in between the long blur of classic babble, but those slightly-clad bikini girls were slightly more interesting. When I noticed that he had finally finished his windy speech I instinctively muttered my first question, forgetting I still had the fruity-fruit-punch straw in my mouth. “How mow you wow for it?” Obviously, he too must have been drinking some fruity-fruit-punch thingy, laced with an inexcusable amount of alcohol for that time of the morning, because he understood exactly what I said and gave me a ridiculous asking price which made me howl into the receiver and fall off my chair in laughter.
He should have known better than to call me so early in the morning and expect me to sell his property at such a crazy price! Did he still think he was living in 2007? The nerve of this idiot! Why did he have to bother me with this ludicrous proposition when I was already in such a depressed state? I was at the bar, drinking fruity-fruit punch-thingies and looking at bikini clad tourist girls to get my mind off the fact that nobody was paying astronomical prices for real estate any more. Property prices had peaked in August 2007. In fact, hardly anyone was buying at all, and when properties don't move, I make no money and when I make no money, I have no money, and when I have no money, my wife still calls me and screams at me with her screechy, goat-like voice to get her more money because the kids have to go to camp…and to music lessons…and to tae kwon do… and to dance lessons, and to whatever other things kids go to these days.
Just then, I noticed two cute bikini-clad tourist girls coming towards the bar. I lifted myself off the floor and back onto the bar stool and tried to get the sick, black, bitter look off my face so that maybe they would like me, but then I realized that I had to answer to the list price proposal from the seller. I picked up the receiver and calmly screamed at him, “Are you nuts!!! Don’t you know we are in the midst of a global recession…the beginning of a depression!? Don’t you, huh…HUH?!” At this point, I knew I had his attention because everyone likes to hear about economic depressions, so I continued.
"Don’t you know what's going on? Don't you know that Greenspan made so much money and credit that people all over the United States borrowed bag-loads of money and stuck them into bad investments, which raised the price of assets to unheard of levels and people thought they were rich because their stocks and homes doubled in price?... Don't you know that they then took out home equity loans based on over-inflated home values, as if their house was an ATM or something, and spent their money on trips to Santorini, where they paid disgustingly crazy prices for tiny cave rooms on the cliff with a view? And when the locals thought everything was just peachy, with all this easy money flowing their way, they went and started to charge even more money for even smaller rooms and inflated the price of everything around here -- including the price of my favourite fruity-fruit punch drink? Did you know that? Huh? Did you?”
At this moment, I noticed that I frightened the cute girls who were sitting at the bar beside me because they swiftly shuffled away, so I quickly noted in my notepad never to mention inflation in asset prices in the presence of cute girls wearing bikinis ever again, and I continued to give the seller a piece of my bitterness.
“And when the locals here were making so much money off the backs of the heavily leveraged Americans, they also started buying properties, over-inflating the price of land, houses and commercial property. And when the property values started going up here too, all the locals thought they were rich and leveraged their over-inflated properties to buy more over-inflated properties to the point that a little donkey stable in Oia was going for the same price as an apartment in Manhattan. Did you know that, sir?”
At this point, I listened for a sign of life on the other end of the receiver to see if he was still listening to me or if I had scared him off like I did the two cute, bikini-clad tourist girls. I did not hear him, but I did happen to hear the cluck of a couple of chickens in the background, meaning that he was probably a village farmer and had no clue about what I was talking about but the comment about the donkey stables selling at Manhattan prices must have grabbed his attention enough not to hang up on me.
“Listen”, I said to the silent farmer with chickens in his vicinity, as I took a big swig of my fruity-fruit-punch thingy in order to calm my nerves. "Property prices here on Santorini have been going up for many years, sometimes 20%-30%, or more, in one year! Santorini had become the “California” of Greece, but this was not sustainable. Up until last year, with all that money floating around, people paid crazy prices for property on Santorini, but now the money is vanishing. From all that money and credit created in the US, inflation has set in and this is squeezing the pocket books of the average American. On top of that, all that easy money and credit has debased the dollar compared to euros and everything here seems even more expensive to them. Americans do not have money to travel, and if they do travel, they are not spending the money like they used to. You can see this at the restaurants, where tourist couples share a Greek salad for their main course meal! You can see this at the hotels, where tourists stuff bags with the free breakfast buffet so they don’t have to spend money for lunch later in the day. Inflation from the creation of money and credit initially raised the prices of assets but has now raised fuel and commodity prices, which has squeezed the consumer and has killed tourism. When tourism dies, then the money floating around here to keep the property prices high vanishes and there is no way you will get 2007 prices for your property. This is the kind of thing that inevitably happens when money is not tied to gold. These are the kind of bubbles created from a fiat-based money system where money is created from thin air by scummy central bankers for corrupt politicians, which abuse their power.”
I was sure at this point that the silent farmer with chickens in his vicinity and an affinity for donkey stables selling at Manhattan prices had flown the coup, but as I listened closely to the receiver I could tell he was still there from the cluck of the chickens in the background. This time I must have retained his attention by my mention of gold, because all old Greek farmers remember the time when gold was the true store of wealth as opposed to the hyper-inflating drachma. Or perhaps he was starting to like me because all old Greek farmers have a sour taste in their mouths for scummy central bankers and corrupt politicians, and he probably liked what I was saying. Thus, I continued.
“So with all that money floating around in the United States, the corrupt banks and adolescent investment people started to look for higher and higher profits and they engineered a whole slew of financial products which ended up looking like a piece of moussaka which had splattered on the floor. Many of the products were mortgage-backed securities with false ratings based on people who could not afford the payments on their loans. As the money was swirling around, the banks were making a ton of money on fees and spreads until finally something went wrong with their models when home prices started to drop for the first time since the depression. That is when the banks started to lose a lot of money. Homeowners also lost a lot of money since their homes were decreasing in value and many of them were underwater from either paying too much for their homes or from taking out loans on their equity”.
Then Bernanke came in on a white horse and created more money and credit to try to prop up home sales and real estate prices, but mostly to save his ailing buddies on Wall Street. He did not care if the dollar was to be driven into the ground causing inflation in food and energy prices. Nor did he seem to pay attention to the fact that the banks had lost so much money on their engineered “spattered-moussaka” financial products that they were actually insolvent rather than illiquid and that increasing their liquidity would not help their solvency issue. So, besides inflation, people were also getting pummelled by loss in equity in the value of their homes and the value of their stock portfolios. All these messed up models and mal-investments were causing financial stocks to drop; banks started to go under, and mortgage lenders were going under. When the bond insurers started going under, this put municipalities at risk and thousands of municipal workers were laid off. While people were losing jobs, some of these newly unemployed people also lost 50% or more from their financial stocks in just a matter of months! Now the bad thing about losing 50% on an asset is that the gain you need to get back to your original investment is 100%, and that could take 10 years or more! Listen, my friend, the best thing to own right now is gold, silver and agricultural land.”
I’m sure he liked that last comment because I could still hear the chickens clucking in the receiver. Perhaps I was getting his hopes up that his land was worth a lot of money, so I continued.
“Now, Bernanke may look stupid, but I think he is smart. Do you know he has studied the depression for most of his academic career? So, why is he doing all this? I’ll tell you why! He is doing it because he knows that he can balance inflation with deflation. He can have money printed to monetize the huge debt of America and he can have money printed to bail out his buddies on Wall Street. Most of the new money will eventually flow to Wall Street where it will inflate asset prices, only to be wiped out by some scam or sucked into the black hole of the financial sector. So, inflation in money supply will be balanced by deflation from the disappearance of capital from the huge losses on Wall Street. No wage price spirals will be created because the money formed will not be going to industry, so jobs will be lost and people will be desperate and willing to work for less money just to survive. Meanwhile, Bernanke and his buddies on Wall Street (and especially Greenspan, the stealth Libertarian and gold bug) will be buying up gold and silver at low, manipulated prices. When everything is about to give, there will be two options available for them. First, they could coerce the government to start a war with Iran to get the people’s mind off the huge fraud on Wall Street; or second, they can pressure for the creation of a global currency based on either gold or silver – and guess who will have all of it!?”
I noticed the bartender looking at me like I was some sort of conspiracy freak or something so I gave him a dirty look and he vanished -- which was perfect because now I could go make my own fruity-fruit-punch drink, since I had no money left to buy another one. As I was mixing my drink behind the bar, I listened closely to the receiver and heard the chickens clucking away. This farmer, with chickens in his vicinity, with an affinity for gold and for donkey stables selling at Manhattan prices, who despised politicians and central bankers, was still on the line!
“So where is this leading?”, I continued. “Well, just look around you. There are less and less tourists, spending less and less money -- a 20-30% drop in 2008 tourism revenues. Construction is seizing and there are 300 000 newly built, unsold homes in Athens. Jobs are being lost and Siemens says it will let go 17500 people globally this year. The Greek banks are feeling the backlash from mal-investment in the neighbouring Balkan countries and who knows what kind of junk they have on their balance sheets. They are beginning to see a tsunami of foreclosures looming from too much easy credit and they have already started to tighten their lending standards. When people can’t borrow, property prices go down. So, in conclusion, sir, I must tell you that I think that your property might sell, if you are lucky, at a 40% discount from your proposed market price. This is not deflation sir; this is the price of your property approaching its real value”
At this point the line went dead and the hum of the dial tone replaced the sound of the occasional chicken cluck. It was OK. I knew well enough that he would call back next year for assistance. Next year he would get the really bad news that his property had reached its real value --- 60% off peak prices. So I sat back against the bar, raised my fruity fruit punch drink and continued to watch the bikini clad tourist girls stroll by.