Italy: Price History

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Italy’s housing market is cooling

For Italy’s housing market 2007 was another year of slower house price growth.The price index for 13 main metropolitan areas rose 6.1% (to €2,417 per sq.m., from €2,300 per sq.m.). This is lower than the 10.6% price increase seen in 2003, 8.7% in 2004, 7.1% increase in 2005 and 6.2% increase in 2006. It was the lowest growth in five consecutive years.

The housing market has been in an upswing since 1997, after a long period of recession in the mid 1990s. House prices have appreciated by 73% (48.5% in real terms) from 1998 to 2007.

The slowing of house price rises is largely attributable to higher mortgage rates. Italian households are sensitive to minor changes in interest rates, because about 87% of mortgage loans are floating or fixed for only one year; less than 10% is fixed for ten years or more.

From the low of 3.47% in September 2005, the mortgage interest rate for one year fixed loans rose to 5.48% in December 2007.

Italy’s economy performed modestly

The economy performed modestly in 2007, with 1.7% GDP growth, still higher than the average growth rate of 0.9% from 2001 to 2006. It is expected that Italy's economy will expand at an annual rate of around 1% during the two years 2008-09.

Inflation was 1.9% in 2007, down from 2.2% in 2006. Consumer inflation is expected to be slightly over 2.5% in the middle of 2008, dropping to around 2% towards the end of the year.

The unemployment rate declined to 6.8% in 2007, from 7.1% in 2006. Real wages rose by 2.6%, after an average of 2.2% annual wage increase from 2001 to 2006.

Buying hotpots in Italy in 2007

Despite the Italy’s unattractive rental law and slowing economy, foreigners still bought a lot of property in Italy in 2007. The top 5 most requested and visited regions in terms of property buying were Liguria, Tuscany, Northern Lakes, Puglia and Umbria, according Homes in Italy, a property sales service.

Liguria was the most visited region of Italy by overseas buyers, thanks to the picturesque beauty of its little villages, the proximity to France and the presence of nearby Nice and Geno airports. It may well be the most expensive region but Tuscany offers a rich combination of landscape, art, history, food, and wine. Property in the north of the region, around Bagni di Lucca still remains affordable. The Northern Lakes continue to be of interest, its proximity to northern Cities, skiing and general tourism appeal to buyers. Puglia which is home to many picturesque and traditional properties is also in the list. Puglia’s interest has been boosted by the low prices it offers in comparison to other areas of Italy. Umbria completes the top 5 listing and a region that still attracts strong demand and a broad range of properties on the market.

The large property segment is dominated by foreign buyers, according to the Italian Federation of Professional Estate Agents (F.I.A.P). Nevertheless, small houses (up to 60 sq. m.) are the most requested by buyers, with the 80.9% of the market. Medium sized properties (60 to 120 sq. m.) follow (14.7% of all requests). Large properties (over 120 sq. m.) account for only 4.4% of buyers’ requests.

The least visited regions in Italy were Veneto, Trentino, Piemonte, Emilia Romagna and Le Marche.

Rent controls, tenancy restrictions

The tax treatment of residential property biases the market towards ownership. There is mortgage interest relief and capital gains tax exemption and, in addition, imputed rental income is taxed using a very low value assessment.

Demographics also play a role. Most renters are young, single people, while older people are more likely to purchase their own house. Italy’s population is aging, and a typical homebuyer is in the 34-54 age-range.

Because of rent controls and other restrictions, rental properties have long yielded poor returns in Italy. When a law was passed in 1978 that enabled landlords to sell their units, a lot of landlords grabbed the chance.

Renting is still unattractive

The 1998 rental law continues to make private renting unattractive. The standard contract enables free negotiation of the initial rent, but commits the landlord to a four-year contract and gives the tenant the option of a four-year extension. Yet rents can only be increased annually by 75% of the cost of living index; i.e. if the inflation is 2% then you can only increase your rent by 1.5%.

The rental law creates distortions. Though landlords try to incorporate expected inflation into initial rents, rents have failed to keep up with inflation since the mid-1990s.

While house prices have been growing at an average rate of 8.2% from 1999 to 2006, rents grew by an average of only 2.6% over the same period. In 2006, rents rose by only 2.4%, slightly higher than the 2.2% increase in 2005.

Rental yields in Italy are generally low at 3% to 5% based on Global Property Guide figures. Apartments in the historical centre of Rome yield 3.7% - 5.3%, while similar apartments in Florence yield slightly higher returns, ranging from 4.8% - 5.8%.

Because of the restrictions on rent increases, most landlords prefer to ‘frontload’ the fixed rents of long rental contracts to take account anticipated future rent increases, inflation and capital value appreciation. Frontloading, in turn, artificially raises rents for new contracts. Due to the rental cost-push effect, households opt for owner-occupation given favorable conditions.

Summing up, rents are structurally sticky; combined with the low yields, this makes buy-to-let investment not a particularly attractive option in Italy.

Stable with a modest increase

The Italian property market, unlike some of its European counterparts, is expected to remain stable during the next two years. Though the steep increases in prices as in recent years are unlikely to continue, a decline is equally unlikely, according to the Bologna-based think-tank Nomisma, which believes that the housing market will be stable, with a modest increase. Their prediction in Italy for 2008 is a small house price increase of 3.8%.

Another institute, CRESME, adds that the market is still lively and it is not likely that present price levels constitute a bubble. Even though the trend of prices is leveling, a new phenomenon is now being registered; in 2008 one sale in five will be to a foreign purchaser.

Italy - more data and information

• Italian house prices, rents, and letting income - real data!
• How expensive are houses in Italy, compared to the rest of Europe?
• How much rent can be earned from Italian property, compared to the rest of Europe?

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posted by Joe Strickley | 2008-04-15

Realtor, Bologna

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