I ‘ve heard numerous times the proposition that the Greek construction sector was a bubble and that its current state is only reasonable and expected since the Greek population is not growing and buildings are not a tradable commodity.
I think that people should clearly distinguish between two rather separate metrics. The house prices index and the share of gross value added accounted by the construction sector. The first could be a bubble without the second being inflated compared to the historical record. Actually that seems to have been the story in Greece since 2000 (with a couple of outliers). Greek house prices recorded a growth rate higher than the rest of Europe (attributed to credit availability and the larger higher wage growth) while the construction sector showed clear signs of stationarity:
Looking at the share of construction in GVA since 1980, the series are clearly stationary until 2007 while there is an almost complete elimination of the sector after 2008 with the 2012 share at 2.72%.
Any drop due to lower population and household formation growth would have been much lower and slow than the current abrupt fall. It seems that the construction share is an AR(1) process with two dummy variables, one for specific outliers and one for the current crisis (from 2008 onwards) being able to explain 93% of the variation since 1980 while a simple test to include population between 15-64 makes the relevant coefficient statistically insignificant:
The crisis (with the relevant credit crunch) seems to be a major driver of the fall in the construction share. Removing its effect would slowly move construction share back to much higher values (close to 6.5% in 3 years time).
Overall, construction does not seem to have reacted to the rise in house prices in the same manner as in other countries (probably because housing was a traditional store of value in Greece for a long time and accounted for a significant part of GVA) while it reacted quite violently to the credit crunch and fiscal crisis. On the other hand, due to its stationary nature, construction seems to be able to stabilize in small shares of GVA even in the presence of credit constraints. Projecting 2012 values into the future leads to a share of 1.84% in 2015 (if the crisis persists). Up to a point, it has hit its Zero Level Bound (as have other parts of Greek GDP).