Italy's housing market improving, despite ailing economy
Italy’s housing market is recovering gradually, despite the country´s struggling economy. Demand is now rising. Residential construction activity is increasing. And the market outlook is improving.
The nationwide house price index fell by 0.8% (-2.25% inflation-adjusted) during the year to Q3 2018, according to the European Central Bank (ECB). Quarter-on-quarter, house prices increased 0.6% in Q3 2018 but actually 1.4% when adjusted for inflation.
Source: European Central Bank
Prices of new houses increased 1.41% (-0.1% inflation-adjusted) y-o-y in Q3 2018 while existing house prices dropped 1.31% (-2.75% inflation-adjusted) over the same period, according to ISTAT.
The average price of new houses in Italy stood at €4,500 (US$5,085) per square metre (sq. m.) in Q3 2018, according to the real estate portal Idealista.it. The average price of new houses is about 24% higher as compared to that of existing houses.
Both demand and supply are increasing. Residential property sales in Italy rose by 2.3% during the first three quarters of 2018, from the same period last year, according to Centro Studi di Abitare Co. It took an average of 4.9 months to sell a new house in Italy in Q3 2018, an improvement from the previous year’s 6.5 months.
During the first half of 2018, the number and area of new dwelling permits rose by 4.7% and 5.9% respectively, according to ISTAT.
“The residential real estate market for new buildings has confirmed its positive cyclical trend in 2018,” said Alessandro Ghisolfi of Centro Studi di Abitare Co. “In comparison to the demand, today the supply is still very underestimated, and this encourages a shortening of sales times that up until three years ago were unthinkable. For 2019, the signs remain positive...”
Italy’s economy expanded by 0.9% in 2018, a slowdown from a growth of 1.6% in 2017, according to ISTAT. The economy registered quarterly declines in the last two quarters of 2018, throwing the euro zone’s third largest economy into a technical recession. The economy is expected to remain weak this year, with some forecasting a full-year contraction.
Italy’s long house-price decline
From 2000 to H1 2008, house prices in Italy rose 85% (53% inflation-adjusted), according to Nomisma. However, house prices started to fall in H2 2008, mainly due to the global financial meltdown.
Unlike in Europe’s more economically vibrant countries, house prices have not yet recovered. From H2 2008 to 2011, house prices fell 1.9% (-7.8% inflation-adjusted). The price drop worsened dramatically from 2011 to 2014, with the Euro crisis impacting Italy’s sluggish economy, and the property tax Tassa sui Servizi Indivisibili (TASI) hindering any recovery. During this period, house prices fell by 13.5% (-16.3% inflation-adjusted), according to the ECB figures.
From 2015 to Q3 2018, house prices increased 2.9%, though in real terms, prices were still down by 4.1%.
Local house price variations
Milan is the most expensive city in Italy, with the average price of new homes rising by 3.3% to €6,750 (US$7,628) per sq. m. during the year to Q3 2018, according to Idealista.it. In Rome, Italy’s capital and largest city, new home prices stood at €6,300 (US$7,119) per sq. m., on average, in Q3 2018, up 1.2% from a year earlier.
In other major Italian cities:
- In Florence, home to many Renaissance art and architecture masterpieces, new home prices increased 0.8% to an average of €4,800 (US$5,424) per sq. m.
- In Turin, Italy’s chocolate capital and home to grand squares such as Piazza Castello and Piazza San Carlo, the average price of new homes rose by 2.3% to €4,450 (US$5,028) per sq. m.
- In Naples, Italy’s third biggest city, new home prices rose by 1.2% to an average of €3,800 (US$4,294) per sq. m.
- The average prices of new houses also rose by 0.7% to €3,700 (US$4,181) in Bologna; by 0.6% to €3,300 (US$3,729) in Genoa; and by 0.4% to €2,900 (US$3,277) in Palermo.
New tax measures likely to boost housing market
From January 2019, pensioners who decide to retire to southern Italy will receive tax privileges. More specifically, the pensioner should transfer his tax residence to an Italian municipality with no more than 20,000 inhabitants located in one of the following regions: Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise, or Puglia.
The new rule applies a substitute tax of 7% on pensions and all other foreign incomes. Other benefits include an exemption from the tax obligations for tax monitoring, as well as for the payment of tax on the value of real estate located abroad (IVIE) and the tax on the value of financial assets held abroad (IVAFE).
Earlier, other tax measures were launched by the government aiming to boost the country’s property market:
- Tassa sui Servizi Indivisibili (TASI) and Imposta Municipale Propria (IMU) tax for principal homes (except luxury homes and castles) were abolished in 2016.
- 25% discount on the IMU tax for houses being lent on an "agreed rental" (canone concordato) contract - a contract with a minimum period of 3 years plus two years of automatic renewal, which also includes compliance to the local authorities’ minimum and maximum rents.
- Flat rate of 4 per thousand and a €200-worth standard deduction on IMU tax for luxury homes and castles.
- Differentiation between mountain land and land on the flat, with the first getting IMU exemption. Also, a further 10% decrease of IMU for building plots has been requested for 2016, after an earlier IMU reduction of around 5% in 2015.
Demand is rising
During the first three quarters of 2018, total residential property sales in Italy rose by 2.3% from the same period last year, mainly driven by strong demand for new homes, according Centro Studi di Abitare Co. New home sales increased by 9.4% while existing home sales dropped 0.2%.
Among the metropolitan cities, Naples recorded the largest sales increase of 15.2% during 2018, according to Idealista.it, followed by Milan with sales rising by 14.5%, Rome (13%), Turin (11.3%), Bologna (9.7%). Sales also rose, albeit at a lesser extent, in Genoa (5.5%), Florence (3.2%) and Palermo (2.6%).
Milan accounted for the largest share, of 25% of total sales.
It takes an average of 4.9 months to sell a new house in Italy in Q3 2018, down from 6.5 months the previous year, according to the real estate portal Idealista.it. Milan has the shortest average time-to-sell a property, at 3.7 months.
Residential construction rising, but still far below peak levels
In H1 2018, the total number of dwellings in authorized new residential buildings rose by 4.7% to 26,301 units from a year earlier, according to ISTAT. Likewise, the usable area of new residential building permits also increased 5.9% y-o-y to 2.34 million sq. m. over the same period.
Despite this, residential construction remains far below the peak levels seen in 2004 to 2007 when dwelling permits averaged 265,000 units annually.
Milan and Rome saw the biggest annual growth in supply in 2018, of 5.4% and 3.2%, respectively, according to Centro Studi di Abitare Co.
Poor rental yields make private letting unappealing
Private renting is unattractive for Italian landlords, with very poor returns on rental properties, caused by rent controls and other restrictions.
Gross rental yields in the historical centre of Rome and of Milan - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - range from 2.4% to 4.5%, with yields in Rome lower than in Milan, according to the Global Property Guide research conducted in August 2018. Yields on 120 square metre (sq. m.) apartments are really low, while yields on smaller apartments are a little better.
Round trip transaction costs can be very high on residential property in Italy and the country’s predatory taxation system makes things worse.
Rome: A 120 sq. m. apartment located in the historical centre of Rome can be rented for €2,584 (US$2,920) per month in 2018. Monthly apartment rents outside Centro Storico range from €17 (US$19) to €22 (US$25) per sq. m., or around €2,198 (US$2,484) per month for a 120 sq. m. apartment.
Milan: In the historical centre of Milan, a 120 sq. m. apartment can be rented for about €2,837 (US$3,206) per month. The same-sized apartment can be rented for €2,671 (US$) per month near Fiera, Milan and for €2,717 (US$3,070) per month in Moscova-Repubblica.
Venice: A 120 sq. m. apartment can be rented for €2,147 (US$2,426) per month.
The standard rental contract allows free negotiation of the initial rent, but commits the landlord to a four-year contract and gives the tenant the option of extending for another four years. Rents can only be increased annually by 75% of the cost of living index; i.e. if inflation is 2%, then you can only increase your rent by 1.5%.
Because of these restrictions on rent increases, most landlords prefer to ‘frontload’ long rental contracts to take account anticipated future rent increases, and inflation and capital value appreciation. Frontloading, in turn, artificially raises rents for new contracts.
Despite this, average rents have failed to keep up with inflation since the mid-1990s. While house prices rose by an average of 6.3% from 2000 to 2008, rents rose by an average of only 2.5% over the same period. However in recent years, the gap has been narrowing because of the continuous decline in house prices.
Housing loan interest rates are at historic lows
At a historic low of 2% in January 2019, from 2.09% in January 2018, according to the ECB, the average interest rate for new housing loans in Italy is very appealing. But very short-term loan rates are rising.
In January 2019 these were housing loan rates in Italy:
- Initial rate fixation (IRF) up to 1 year: 3.08%, up from 1.92% a year earlier
- IRF of 1-5 years: 2.51%, slightly down from 2.52% a year earlier
- IRF of over 5 years: 2%, down from 2.08% in the previous year
Italy´s mortgage market is small
Italy’s mortgage market is still small, with outstanding mortgages equivalent to less than 22% of GDP in 2018, less than half of EU 28’s average of about 47% of GDP, according to the European Mortgage Federation (EMF).
This is largely attributable to the length and cost of the loan recovery process, which makes Italian banks very cautious.
From the time a borrower defaults, legal proceedings usually take from five to seven years. Italian house buyers are also reluctant to use mortgage facilities, despite tax benefits, according to the Royal Institution of Chartered Surveyors (RICS). The takeup of mortgages expanded sharply when interest rates on new house purchases fell to historical lows of 2.7% in 2010, but since then the demand for new loans for house purchases has slowed sharply, despite generally very low interest rates.
That mortgage market’s small size means interest rate reductions tend to have a relatively small effect on the Italian housing market, even though about 50% of housing loans were variable rate.
In January 2019, outstanding housing loans rose slightly by 1.1% to €379.71 billion (US$429.1 billion) from a year earlier, up from an annual average growth of just 0.4% in 2012-2018 but sharply down from 12% annual growth in 2004-2011, according to the ECB.
Why do more Italians now live in their own homes than in the 1980s?
In 2018, around 72.4% of the country’s total households were owner-occupiers, an increase from 59% of total households in 1980, according Eurostat figures.
Sardinia and Sicily have most owner-occupiers, at around 84.1%. The South and North-West regions have relatively lower rates of owner-occupiers at 78.7% and 77.7%, respectively.
Why the rapid increase in home ownership?
- Living standards have risen, despite relatively slow economic growth.
- There are tax breaks for ownership, mortgage relief, and low value assessments when calculating imputed income tax and capital gains taxes.
- New housing supply is almost exclusively destined for homeownership.
- The Fair Rent Act of 1978 established a common four-year lease, and continued rent controls.
Italy´s banking system is now stronger. Three years ago it was on the verge of collapse
Italy’s banking system has been in crisis, and there is still a possibility of collapse. However, recent developments suggest a gradual recovery.
The amount of bad loans held by Italian banks remains high, but is continuously declining – €100.2 billion (US$ 113.2 billion) in December 2018, down from €178 billion (US$ 201.2 billion) in December 2017 and €215 billion (US$ 243 billion) at the end of 2016, according to the Bank of Italy.
"The Italian banking industry is emerging from a prolonged period of distress. The ongoing economic recovery and the resolution of important critical cases have drastically reduced tail risk and are helping to improve confidence," said Bank of Italy Deputy Governor Fabio Panetta in a recent publication.
"Critical cases" included the recapitalization of Banca Monte dei Paschi di Siena in 2017, the liquidation of Popolare di Vicenza and Veneto Banca, and the sale of four banks put into resolution in November 2015.
Despite these improvements, Italy’s banking crisis is far from over. Banca Carige SpA has recently been the focus of attention after the ECB took the unprecedented step of placing the cash-strapped Italian lender under temporary administration in January 2019, a move that could lead to a sale or a merger. The government also approved a decree that allows Carige’s future bond issuances, as well as a precautionary public recapitalization plan.
Italy has the second-highest public debt to GDP ratio in Europe, only next to Greece. Italy’s public debt surged to around 132.1% of GDP in 2018, up from 131.3% of GDP in 2017 and the highest on record, according to ISTAT.
Italy’s economy is forever struggling
Even before the financial crisis, the Italian economy was growing sluggishly, with average GDP growth of 1.2% from 2001 to 2007.
It has been a miserable decade since then. Italy´s economy contracted by 1.1% in 2008 and by another 5.5% in 2009. The country went back to 1.7% growth in 2010 and 0.6% in 2011, but contracted by 2.8% in 2012 and 1.7% in 2013, according to the International Monetary Fund (IMF). Italy’s economy then grew by 0.1% in 2014, 1% in 2015, and 0.9% in 2016. Italy’s economy expanded 0.9% in 2018, a slowdown from a seven-year high growth of 1.6% in 2017, amidst trade tensions and weaker investment outlook.
The Bank of Italy , the country’s central bank, expects the economy to expand by a meagre 0.6% this year. However, some economists are more pessimistic, projecting a full-year contraction in 2019. In fact, the economy registered quarterly declines in the last two quarters of 2018, throwing the euro zone’s third largest economy into a technical recession.
Consumer prices in Italy rose by around 1% in February 2019, up from 0.9% in the previous month and 0.5% a year earlier, according to ISTAT.
Unemployment was about 10.8% in 2018, slightly down from an average of 11.7% from 2012 to 2017, according to the IMF.
At 2.1% of GDP in 2018, the budget deficit was the lowest since 2007. The government targets a deficit of 2% this year.
A populist nightmare followed the March 2018 elections
On March 4, 2018, Italy held a general election. The election resulted in a hung parliament since no particular party won an overwhelming majority. Two months after the election, it was announced that a little-known law professor Giuseppe Conte has been proposed as the head of the coalition cabinet between the far-right League led by Matteo Salvini and the post-ideological Five Star Movement led by Luigi Di Maio.
In other words, a populist nightmare - sending the Italian bond markets plunging and causing alarm in Brussels. Both allies are anti-EU, anti-immigrant, and are supported by ecosystems of fake news, pushing anything from anti-Semitic and racist propaganda about George Soros to claims about the Obama administration plotting to smuggle migrants from Libya to Italy, or anti-vaccine conspiracies.
The Five Star Movement has been particularly good at presenting sanitised messages in mainstream media while allowing their social media followers to spread hate, racism and fake news.
The two parties’ informal media networks are separate, but interconnected, and have links to far-right and pro-Russia propaganda sources in the West.
Worse, the coalition’s expansionary budget designed to meet costly election promises does not help the country’s ailing economy, which officially entered technical recession in the last two quarters of 2018. In fact, the European Commission has repeatedly criticized the Italian government’s policies and warned of “contagion” that could hit the rest of the region.
“Don’t underestimate the impact of the Italian recession,” said French Finance Minister Bruno Le Maire.
“The European Union is right about Italy,” said Corrado Alberto of entrepreneurs association Api. “Those who talk about stagnation are way too optimistic, we are facing a real recession.”
- World Economic Outlook Databases (International Monetary Fund): https://www.imf.org/en/Publications/SPROLLS/world-economic-outlook-databases#sort=%40imfdate%20descending
- Residential property price index statistics (European Central Bank): https://sdw.ecb.europa.eu/browse.do?node=9691230
- Italy Homeownership Rate (Trading Economics): https://tradingeconomics.com/italy/home-ownership-rate
- Gross rental yields in Italy are low (Global Property Guide): https://www.globalpropertyguide.com/Europe/Italy/Rental-Yields
- Hypostat 2018: A review of Europe’s mortgage and housing markets (European Mortgage Federation): https://hypo.org/app/uploads/sites/3/2018/09/HYPOSTAT-2018-FINAL.pdf
- Housing market in Italy: what’s the picture for the biggest cities? (Idealista.it): https://www.idealista.it/en/news/property-sale-italy/2019/01/09/2341-housing-market-italy-whats-picture-biggest-cities
- Italy GDP grows 0.9 percent in 2018, deficit and debt ratios overshoot government targets (Euronews): https://www.euronews.com/2019/03/01/italy-gdp-grows-0-point-9-percent-in-2018-deficit-and-debt-ratios-overshoot-governemnt-targets
- Italy central bank slashes 2019 GDP growth forecast (Reuters): https://www.reuters.com/article/italy-economy-cenbank-gdp/italy-central-bank-slashes-2019-gdp-growth-forecast-idUSR1N1W502G
- Italy country profile (BBC News): https://www.bbc.com/news/world-europe-17433142
- Italian banks’ gross bad loans drop to 100.2 bln euros at end-2018 (Reuters): https://www.reuters.com/article/italy-banks/italian-banks-gross-bad-loans-drop-to-1002-bln-euros-at-end-2018-idUSS8N1ZG04P
- Despite years of recovery, Italy’s bank problems are still not solved (CNBC): https://www.cnbc.com/2019/01/10/italy-banks-are-still-weak-and-a-problem-for-the-euro-zone-.html
- Italy alarms Europe a year after elections (FMT News): https://www.freemalaysiatoday.com/category/business/2019/03/04/italy-alarms-europe-a-year-after-elections/
- Tax relief for pensioners who move to the south of Italy (Idealista.it): https://www.idealista.it/en/news/financial-advice-italy/2019/03/19/2392-tax-relief-pensioners-who-move-south-italy
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