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Feb 03, 2014

Italy's house prices down 6.5% on the year. Will it ever end?


 

Italy house prices House prices are still falling in Italy, although the decline slowed during the past two quarters. House prices in Italy have been on a declining trend for almost five years.  Italy’s house price index fell by 6.54% during the year to Q3 2013, according to Eurostat. When adjusted for inflation, the index actually declined by 7.58%.

Property sales weakened during the third quarter of 2013, with home sales declining by around 6.6% y-o-y, as reported by ANSA. However the decline was less than the previous quarter, with sales declining by 7.7% in Q2 2013, and lower than the 8.3% y-o-y during the first half of the year. In 2013, Nomisma estimates that transactions will be around 407,000, a sharp decline from around 869,000 in 2006.

House prices will continue to fall for the next two years, according to Luca Dondi, Nomisma’s Managing Director. House price increases are unlikely in less than three to five years, but they will be preceded by a recovery in the commercial real estate market which is expected to occur in 2015.

The Italian economy was still in the doldrums in 2013, with GDP falling 1.8% due to a reduction in domestic demand. The economic outlook for Italy is better in 2014, with growth expected to be around 0.7%.

From 2000 to H1 2008, house prices rose 85% (53% inflation-adjusted), based on figures from 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 8.6% (-14.3% inflation-adjusted).

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

"The Italian real estate market is still on the mend and the new tax system will reduce the profitability of buying a house to rent it," according to Scenari Immobiliari’s founder and president, Mario Breglia.

Lower interest rates

Italy interest housing loans

The average interest rate for new housing loans was 2.92% from May 2009 to March 2011, but then rose to a maximum of 4.3% in February 2012. After the ECB rate was reduced from 1% to around 0.75% in July 2012, the average interest rate for house purchases also started declining along with the ECB rate. In November 2013, the interest rate for new housing loans was at 3.54%.

Housing loan rates in Italy, November 2013:

  • Fixed rate up to 1 yr: 3.23%
  • Fixed rate 1-5 yr: 3.65%
  • Fixed rate 5-10 yr: 4.45%
  • Fixed rate 10 yr +: 4.73%.

Italy’s interest rates reflect European Central Bank rates. Due to a decline in the euro zone inflation below its target as well as rising unemployment, the ECB decided to cut its base rate from 0.75% to 0.50%. After a few months later, the ECB made another surprising rate cut of around 25 basis points to 0.25% in November as a reaction to the sudden drop of inflation to an annual rate of 0.7% (below the 2% target) in October 2013.

Mortgage debt in Italy is lower than EU’s average

Outstanding mortgages in Italy were 23.3% in 2012, significantly below the EU27’s average of 52% of GDP, according to the European Mortgage Federation (EMF).

Italy outstanding mortgage

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 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).

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 with the exception of 2010, the demand for new loans for house purchases has been falling from 2008 to 2012, despite generally very low interest rates.

In 2012, the number of housing transactions fell by 26% y-o-y.  Combined with worsening labor market prospects, postponed investment decisions, and the reintroduction of a wealth tax on real estate in January 2012, led to a 46% y-o-y decline in gross residential lending in 2012, according to the EMF.

Poor yields, unattractive private letting

Italy house rent consumer

Private renting is still unattractive for Italian landlords, with very poor returns on rental properties caused by rent controls and other restrictions. Property yields in Italy range from 2.8% to 4.6%, according to Global Property Guide research in June 2013.

Smaller apartments have higher yields. In the historical centre of Rome, yields for 50 sq. m. apartments are at around 4.22%, while larger apartments of around 200 sq. m. have yields averaging 3.54%.

Apartments in Rome’s suburbs have yields ranging from 3.25% (200 sq. m.) to 4.56% (50 sq. m.). Gross rental yields in Milan range from 2.83% (120 sq. m.) and 4.10% (50 sq. m.).

Rents in the historical centre of Rome are much higher with monthly rents ranging from €1,000 to €3,600. Milan’s apartments have rents between €840 and €3,000. Apartments in Rome’s suburbs have cheaper rents ranging from €800 to €2,600.

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. In 2009 and 2010, rents rose by only 2.36%, while residential property prices dropped by an average of 0.2%.

High homeownership rate

Italy is a nation of home-owners. 80% of all homes are owner-occupied, especially in the south and small towns, up from 59% in 1980.

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

Better economic outlook in 2014

Italy GDP unemployment

The Italian economy was still in recession in 2013, with GDP down 1.8% due to falling domestic demand. The fall in domestic demand was partly offset by external demand’s positive contribution to the economy. GDP growth is expected to bounce back to 0.7% in 2014, 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$ 33,909 in 2013. However, the country’s public debt is also remarkably large, with an expected 130.4% debt-to-GDP ratio in 2013. Since 2007, public debt in Italy has steadily increased, rising from 103% of GDP to 127% of GDP in 2012, and Italy currently has one of the highest debt to GDP ratios in the euro zone.

In 2012, the budget deficit was reduced to about 2.9% of GDP, down from 3.9% of GDP in 2011, 4.6% in 2010 and 5.4% in 2009. In 2013, budget deficit target was cut to 1.5%, so the deficit should be within the European Union’s 3% of GDP deficit ceiling in 2014.

In November 2013, Italy’s overall unemployment rate reached a record high of 12.7% - far higher than the annual average of 7.5% from 2004 to 2011, according to ISTAT.

The average inflation rate for 2013 was 1.2%, according to ISTAT, up 0.7% on the previous year.






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