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May 30, 2017

House sales volumes are up in Italy


 

Italy house prices House prices in Italy may still be depressed, but things are looking up for the country's housing market in 2017, at least as seen in the rising trend of residential property sales in the recent years. "The general tendency remains positive,” says Luca Dondi, Nomisma's general manager. Dondi noted that Nomisma saw a 16.3% y-o-y rise in transactions in 2016 and predicts a 7% increase in sales in 2017.

Property sales are one thing, but prices are another.  House prices in Italy have been declining for around eight years, falling by around 16.9% (23.8% inflation-adjusted) from Q3 2008 to Q4 2016, based on ECB figures.   In Q1 2017, prices of second-hand homes in Italy dropped by 5.7% y-o-y to €1,869 (US$ 2,048.61) per square metre (sq. m.), according to the real estate portal Idealista.it.   The more comprehensive house price index produced by the European Central Bank (ECB) was slightly up by 0.21% during the year to Q4 2016. When adjusted for inflation, the index still fell by 0.01%.

Rome, the country's capital, saw an annual house price decline of 2.5% in Q1 2015, according to Idealista.it. Out of Italy's regions, only Basilicata saw a y-o-y price hike by around 3.1%, while the region of Molise saw no y-o-y price movement in Q1 2017. The regions of Lombardy (-9.2%), Umbria (-8.5%), Puglia (-6.8%), Piedmont (-6.7%), Campania (-6.7%), and Sicily (-6%), had the sharpest y-o-y price drops in Q1 2017.

Trieste (4.6%), Bologna (2.1%), and Florence (1.1%) were the only major cities that experienced annual price increases in Q1 2017. In contrast, huge y-o-y price drops were seen in the cities of Bari (-11.7%), Perugia (-10.1%), Palermo (-9.8%), Brescia (-9.4%), Vicenza (-8.7%), Genoa (-8.4%), Ancona (-8.2%), and Turin (-7.5%).

House prices in Milan and Naples also dropped, but at smaller rates of 2.3% and 4% y-o-y, respectively.

Italy's most expensive houses - on average - can be found in Venice, with an average house price of around €4,401 (US$ 4,823.94) per sq. m., according to Idealista.it. It was followed by Florence with €3,440 (US$ 3,770.58) per sq. m., Bolzano with €3,374 (US$ 3,698.24), Milan with €3,346 (US$ 3,667.55), Rome with €3,274 (US$ 3,588.63), and Naples with €2,790 (US$ 3,058.12).

Home sales in Italy maintained their strong growth for the third consecutive year. Residential property sales surged by 18.9% with about 528,865 residential properties units sold, during the year to 2016, according to Agenzia delle Entrate. All major cities covered by Agenzia delle Entrate had higher sales in 2016. The highest surge was in Turin, with sales rising by 26.4% y-o-y in 2016. Property sales were also strong in these cities: Bologna (up 23.7%), Genoa (22.9%), Milan (21.9%), Naples (17.1%), and Florence (16%). Sales in Rome and Palermo also rose but at a relatively slower pace, by 10.6% and 9.2%, respectively.   

The rise in home sales was accompanied by a surge in the mortgage market, according to Agenzia delle Entrate. In 2016, the number of mortgages rose by 27.3% to 246,182 units, while the total amount of mortgage loans surged by 27.8% to almost €30 billion.

Fitch Ratings expect stabilization of house prices in Italy this year, after several years of price declines. According to Fitch, improved housing demand, low interest rates, and increased credit availability will pull up house prices. However, the ratings company sees a stagnation in the southern areas, which suffered from huge price drops in the last four years, as compared to the northern region.

Scenari Immobiliari also predicts a slight recovery of the Italian real estate market this year, expecting a 4% growth in the sector with sales of residential properties reaching at least 550,000 units. Scenari Immobiliari President Mario Breglia, however, sees unemployment and high taxation as hindrances to the market's real recovery, amid potential demand at approximately 850,000 homes.

New tax measures to boost housing market

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.

From H2 2008 to 2011, house prices fell 1.9% (-7.8% inflation-adjusted), using ECB figures. The price drop worsened dramatically from 2011 to 2014, with the Euro crisis impacting Italy's sluggish economy, and the property tax TASI hindering any recovery. During this period, house prices fell by 13.5% (-16.3% inflation-adjusted), according to the ECB figures. Price declined continue even in 2015, with annual price drops averaging 2.93% during the first three quarters.

In 2016, new tax measures were launched by the government aiming to boost the country's property market:

  • TASI and IMU tax for principal homes (except luxury homes and castles) abolished.
  • 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.

The country is also trying to persuade wealthy individuals to transfer their tax residence in Italy, giving them an option to apply for an flat annual tax payment of €100,000 (and an additional €25,000 for each family member) as a substitute tax on foreign income. This was included in Italy's 2017 Budget Law, which allows new tax residents to apply for this tax regime that appeals to eligible "Resident Non-Domiciled" individuals. If successful, this new tax regime may boost top-end property prices.

Existing dwelling prices have done well

During the year to end of Q4 2016, the price index for existing dwellings slightly rose by 0.12% (0% inflation-adjusted), after annual price drops of 0.62% in Q3 2016, 0.74% in Q2 2016, and 1.23% in Q1 2016, according to ISTAT.  In contrast, the new dwellings price index dropped by 0.1% (-0.23% inflation-adjusted) during the year to Q4 2016.

Interest rates are at record lows

Italy interest rates

The average interest rate for new housing loans stood at a historic low of 2.02% in December 2016. It was below the previous year's rate of 2.5%, from 2.83% in 2014, 3.5% in 2013, 3.69% in 2012, and 4.03% in 2011, according to the Bank of Italy.

Housing loan rates in Italy in December 2016:

  • Fixed rate up to 1 yr: 1.7%
  • Fixed rate 1-5 yr: 1.85%
  • Fixed rate 5-10 yr: 2.07%
  • Fixed rate 10 yr +: 2.18%

From 1% in 2012, the ECB key rate was reduced by six times to a its record low rate of 0% in March 2016. The ECB rate has been unchanged since then.

Small but growing mortgage market

Italy's outstanding mortgages were worth around 22.1% of the country's GDP in 2015, less than half of EU 28's average of 48.1% of GDP, based on the figures from the European Mortgage Federation (EMF). Although the country's mortgage market is smaller than other EU members, the ratio of outstanding mortgage to Italy's GDP has grown from a meagre 7% share in 1997, to more than 20% since 2010.

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).

Italy outstanding housing loans

That means that though most housing loans were 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 huge growth in 2010, the demand for new loans for house purchases slowed sharply in 2011, and fell in the next three years. Outstanding residential loans fell by 0.6% in 2012, 1.1% in 2013, and 0.6% in 2014, despite generally very low interest rates. In 2015, outstanding residential loans rose slightly, by 0.8%.

The rise of demand for housing loans in 2015, was attributed to the changes in taxation on home sales introduced by the government in the previous year, coupled with the new lending scheme sponsored by the Italian Banking Association and Cassa Depositi e Prestiti, which allocated €2 billion to new originations for house purchases or rebuilding. 

The number of housing transactions with a fixed mortgage rose by 19.5% y-o-y to around 193,000 units in 2015. Around 50% of mortgage loans in 2015 are fixed-rate mortgages, as most families chose certainty of fixed rates over the risk of future rate hikes, according to the EMF.

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.

This was reflected on the poor gross rental yields in Rome and Milan. In Rome's historical centre, gross rental yields on apartments are ranging from 3.36% to 3.78%, with smaller apartments earning higher returns than its larger counterparts, based on the Global Property Guide research in June 2016.

Apartments in Rome's suburbs have rental yields ranging from 3.77% (for 90 sq. m. apartments) to 3.87% (for 120 sq. m. apartments). In Milan, gross rental yields range from 3.52% (for 120 sq. m. apartments) to 3.80% (for 90 sq. m. apartments).

In Rome's historical centre, a 120 sq. m. apartment can be rented for €1,952 (US$ 2,130.61) per month. In the suburbs of Rome, monthly rents range from €12 (US$ 13.10) to €13 (US$ 14.19) per sq. m., or around €1,439 (US$ 1,570.67) per month for a 120 sq. m. apartment. In Milan, a 120 sq. m. apartment can be rented for around €1,721 (US$ 1,878.47) 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.

Most Italians are homeowners

Italy homeownership

Italy is a nation of home-owners. In 2015, around 81% of the country's total households are owner-occupiers, up from 59%in 1980, based on the figures from ISTAT

Sardinia and Sicily had the highest number of owner-occupiers among Italy's regions at around 85.5%. Homeownership rates are also high in the North-East (82.5%) and Centre (82.3%). Both the North-West and South have relatively lower homeownership rates at around 79% and 78.7%, 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

Slow economic growth

The Italian economy registered 0.9% economic growth in 2016, slightly up from  0.8% GDP growth in 2015. The last 2 quarters saw the strongest y-o-y growth since Q2 2011.

The economy had been stagnant in the previous two years, posting meagre growth of 0.8% in 2015 and 0.1% in 2014. 

Even before the crisis, the Italian economy had already been growing sluggishly, with average GDP growth of 1.26% from 2001 to 2007.  It contracted by 1.1% in 2008 and by another 5.5% in 2009. The country went back to 1.7% growth in 2010, and growth of 0.6% in 2011, but there were then contractions of 2.8% in 2012 and 1.7% in 2013, according to the International Monetary Fund (IMF). So it has been a miserable decade.

The threat of another banking crisis

In addition to the lacklustre economy, the country faces a potential banking crisis in the near future. The number of bad loans held by the country's banks reached €202.76 billion (US$ 220.76 billion) in March 2017, according to the Bank of Italy. The situation became so bad that the ECB ended up monitoring liquidity levels of some Italian banks on a daily basis. To ease the problem of bad loans, Italy has arranged a deal with the European Commission to aid its worst banks sell non-performing loans and raise new capital.

All eyes are now on Monte dei Paschi (MPS), the oldest surviving bank in the world and the third largest bank in Italy. News broke out in December 2016 that the bank was running out of cash and might become insolvent within four months without fresh capital. The bank was suspended from trading.  After MPS requested a precautionary recapitalization from the government, the Italian parliament approved a €20 billion (US$ 21.76 billion) package in December 2016, which would serve as available funds for recapitalization of not just MPS, but other banks (such as UniCredit, Banca Popolare di Vicenza, Veneto Banca and Banca Carige) that would need it in the near future.

Italy’s public debt is remarkably large, estimated at around 132.6% of GDP at the end of 2016. Since 2007, public debt in Italy has steadily increased, rising from 103% of GDP to 127% of GDP in 2012, 129% of GDP in 2013, and to more than 130% of GDP in 2014 and 2015. Italy currently has the second-highest public debt to GDP ratio in Europe, only next to Greece.

In April 2017, Fitch Ratings downgraded Italy's sovereign debt from BBB+ to BBB, which is just a notch above junk status. The credit rating downgrade was attributed by Fitch to Italy's several economic problems, including the country's massive public debt, fragile banking system, and sluggish economy. "Italy's persistent track record of fiscal slippage, back-loading of consolidation, weak economic growth, and resulting failure to bring down the very high level of general government debt has left it more exposed to potential adverse shocks. This is compounded by an increase in political risk, and ongoing weakness in the banking sector which has required planned public intervention in three banks since December," according to Fitch Ratings.

The Italian government has lowered its deficit target for 2017 to 2.1% of GDP from an earlier target of 2.3%, due to the new emergency cuts recently made by the government in response to the European Union's appeal to further reduce Italy's budget deficit. In January 2017, the European Commission reportedly asked Italy for a reduction of its 2017 budget deficit by around €3.4 billion (US$ 3.70 billion). In reducing the deficit, the Italian government, in turn, will be raising taxes on tobacco and gambling, and will crack down on value added tax (VAT) evasion.

Consumer prices in Italy were up by 1.8% during the year to April 2017, after a 1.4% y-o-y growth in the previous month, and an improvement from a 0.5% annual deflation in April 2016. In March 2017, the country's unemployment rate was at 11.7%, slightly up from 11.5% in February, according to ISTAT.

In December 2016 Italy held a constitutional referendum, which gave Italian voters a chance to approve reforms in the composition and  powers of the parliament. However, the Italian voters rejected the reform, with 59.1% against, leading to the resignation of Matteo Renzi as the country's prime minister. Renzi was replaced by fellow social democrat Paolo Gentiloni.






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