Italy's housing market improving

March 05, 2015


Italy house prices House prices are still falling in Italy.  But the rate of decline has slowed during the past several quarters, after five years of continuous declines.  House prices have fallen a total of about 20% since 2008.

Italian house prices are projected to drop by another 2% this year, before registering a minimal growth of 0.9% in 2016 and 2% in 2017, according to the research house Nomisma. “Unless the economy worsens further, a timid price recovery is expected at least in the cities in 2016,” Nomisma said.

Italy’s house price index fell by 3.84% during the year to Q3 2014, the lowest y-o-y decline since Q3 2012, according to Eurostat. When adjusted for inflation, the index only fell 3.57% (Nomisma has similar figures, with average property prices in the country’s 13 biggest cities falling 4% for new and 4.4% for existing homes).

Rome saw an annual house price fall of 4.1% in 2014.  Milan and Venice registered declines of 3.2% and 4.8%, respectively. These three major cities are the most expensive Italian cities, with houses priced above €3,000 per square metre (sq. m.), according to Nomisma.

Bologna, Mestre and Padua recorded the highest annual house price falls in 2014, at between 5% and 5.3%

Padova and Venezia Mestre had the longest time to complete a sale, at about 9.5 months. 

Sales in Italy's cities are rising.  Residential property sales soared by about 23% in Florence and by 19% in Bologna y-o-y to Q3 2014. In Rome, residential property sales were also up by 11.8% over the same period. In Q3 2014, there was also an increase in activity in other major cities, such as in Genoa (10.4%), Palermo (8.9%), and Naples (7.3%), according to ANSA.

The number of property transactions country-wide rose by about 3.6% in the third quarter of 2014 from a year earlier, to almost 207,000 transactions, according to the country’s revenue agency Agenzia Entrate.

The increase in demand was partly due to the return of foreign homebuyers, especially from the United Kingdom and the United States.

The history of the crisis

From 2000 to H1 2008, Italian house prices rose 85%, based on figures from Nomisma (53% inflation-adjusted). However, house prices fell by 8.6% from H2 2008 to 2011 (-14.3% inflation-adjusted), and fell by another 10.3% from 2011 to 2013 house prices (-13% inflation-adjusted), according to ECB figures.

Deterring the housing market recovery is the recently introduced property tax TASI, which now affects main and secondary homes, which is tied to a garbage tax and an existing tax on secondary homes.

The Italian economy was still in the doldrums in 2014, with GDP falling by another 0.2%, after contracting by 1.9% in 2013 and 2.4% in 2012, according to the International Monetary Fund (IMF). The economic outlook for Italy is better in 2015, with growth expected to be around 0.9%.

The primary market is recovering faster

Italy price index homes

The primary housing market is recovering faster than the secondary market. During the year to end-Q3 2014, the price index for new houses fell by just 1.27% (-1% inflation-adjusted), after annual declines of 2.91% in Q2 2014, 2.9% in Q1 2014, and 3.63% in Q4 2013, according to ISTAT.

The price index for existing homes dropped 4.8% (-4.53% inflation-adjusted), after y-o-y declines of 6.27% in Q2 2014, 6.23% in Q1 2014, and 8.25% in Q4 2013.

Record low interest rates

Italy average interest rates

From 2012 to 2014, the ECB rate was reduced five times to reach a record 0.05% in September 2014. The ECB rate has been kept unchanged since then.

As a result, the average interest rate for new housing loans reached a record low of 2.88% in December 2014, down from 3.01% in 2013, 3.05% in 2012, and 3.69% in 2011, according to the European Central Bank (ECB).

Housing loan rates in Italy in December 2014:

  • Fixed rate up to 1 year: 4.71%
  • Fixed rate 1-5 years: 3.6%
  • Fixed rate over 5 years: 2.88%

The Italian mortgage market remains small, due to a weak legal system

The mortgage market remains small, though the ratio of outstanding mortgage to GDP has shown significant growth, climbing from 7% in 1997 to more than 22.9% of GDP in 2014.  The underdevelopment of the mortgage market is partly attributed to the length and cost of the loan recovery process, which makes Italian banks 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).


That means that though most housing loans are now variable rate (only 36% of Italy's outstanding housing loans were fixed rate at end-2008), interest rate reductions tend to have a relatively small effect on the market.  However things could be changing, as in 2010 the takeup of mortgages expanded by around 26% when interest rates on new house purchases fell to historical lows of 2.7%.  Nevertheless after a huge growth in 2010, the demand for new loans for house purchases slowed sharply in 2011 and declined by 0.5% in 2012, 1.2% in 2013 and by another 0.6% in 2014, despite generally very low interest rates. In 2014, the total outstanding housing loans in Italy amounted €359.32 billion, according to the ECB.

In 2015, the demand for housing loans is expected to increase, due to changes in taxation on home sales introduced by the government last year coupled with the new lending scheme sponsored by the Italian Banking Association and Cassa Depositi e Prestiti, which allocates €2 billion to new originations for house purchases or rebuilding.

Poor yields, unattractive private letting

Italy house rent consumer

Private renting is unattractive for Italian landlords, with very poor returns on rental properties caused by rent controls and other restrictions.

Gross rental yields on apartments in Rome and Milan are poor.  Gross rental yields on apartments in Rome’s historical centre range from 3.57% to 4.02%, with little difference in returns by size, according to Global Property Guide research conducted in June 2014.

In the suburbs, rental yields range from 2.97% (200 sq. m.) to 4.72% (50 sq. m.), with large apartments clearly yielding poorer investment returns.

Apartments in Milan return rental yields of between 3.62% and 4.30%, with again no clear pattern of rental returns.

In the historical centre of Rome, a 120 sq. m. apartment can be rented for around €2,300 per month. In the suburbs of Rome, rents range from €13 to €16 per sq. m. per month or around €1,500 per month for a 120 sq. m. apartment. In Milan, a 120 sq. m. apartment can be rented for around €1,600 per month.

When a law was passed in 1978 encouraging landlords to sell, a lot of landlords grabbed the chance.

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 is narrowing because of the continuous decline in house prices.

High homeownership rate

Italy homeownership

Italy is a nation of home-owners. Currently, about 81.5% of all homes are owner-occupied, especially in the south and small towns, up from 59% in 1980, according to ISTAT.

Italy’s Islands, consisting of Sardinia and Sicily, have the highest homeownership rate of about 87.5%. It was followed by the North-East with 82.2%, and the Centre and the Southern region with both 81.5%. The North-West had the lowest homeownership rate, at 78.9%.

Why the rapid increase in home ownership?

  • Mortgage borrowing is now much easier.
  • 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 economy to return to growth in 2015

Italy gdp inflation

The Italian economy was still in recession in 2014, The Italian economy was still in the doldrums in 2014, with GDP falling by another 0.2%, after contracting by 1.9% in 2013, according to the International Monetary Fund (IMF). GDP growth is expected to bounce back to 0.9% in 2015, with rising private consumption and an increase in investments.

Italy’s economy went back into recession in 2012, with GDP falling 2.4%, preceded by meagre growth of 0.4% in 2011 due to the euro zone crisis. The country became one of the first euro zone victims of the global financial meltdown of 2008. The economy contracted by 1.2% in 2008 and by another 5.5% in 2009. The country went back to 1.7% growth in 2010, but this did not last.

Even before the global crisis, the Italian economy had already been growing sluggishly, with an average real GDP growth rate of 1.26% from 2001 to 2007.

Italy is the euro zone’s third largest economy with a total population of almost 61 million and a GDP per capita of US$35,512 in 2014. However, the country’s public debt is also remarkably large, estimated between 135% and 137% of GDP in 2014. Since 2007, public debt in Italy has steadily increased, rising from 103% of GDP to 127% of GDP in 2012 and to more than 130% of GDP in 2013. Italy currently has one of the highest debt to GDP ratios in the euro zone.

From January to September 2014, the country’s budget deficit widened to 3.7% of GDP, compared with 3.4% in the same period in the previous year, according to ISTAT. In 2013, the budget deficit was reduced to about 2.8% of GDP, down from 2.9% of GDP in 2012, 3.9% of GDP in 2011, 4.6% in 2010 and 5.4% in 2009.

In December 2014, the overall unemployment rate stood at 12.9%, down from 13.3% in November 2014 but up from 12.6% in the same period last year, according to ISTAT.

In February 2015, consumer prices dropped 0.2% from the same period last year, after an annual deflation of 0.6% in the previous month and an inflation rate of 0.5% a year ago, according to ISTAT.

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