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House sales volumes are up in Italy
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.
Gross rental yields in Italy are low
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. Yields on 120 square metre (sq. m.) apartments are really low, yields on smaller apartments a little better.
Prices of apartments. Apartments in the wealthy suburbs of Rome cost on average between €4,400 to €4,900 per sq. m.. A 120 sq. m. apartment in the suburbs would cost around €4,450 per sq. m. In the historic centres of Rome and Milan, prices are nearer €8,000 per sq. m.
Conclusion: Property prices in Italy are beginning to look attractive. But gross rental yields are very poor, and Italy’s predatory taxation system doesn’t help.
Round trip transaction costs can be very high on residential property in Italy. See our Italy residential property transaction costs analysis and our Residential property transaction costs in Italy compared to other countries.
Rental income tax is high in Italy
Rental Income: Nonresidents are taxed on rental income earned in Italy. The rates range from 23% to 43%. Personal allowances for spouse and family are not available to nonresidents, but certain deductions may be granted.
Capital Gains: Capital gains are not taxed if the property was held for more than five years. Otherwise capital gains are considered as ordinary income and taxed at progressive rates.
Inheritance: Inheritance taxes are levied at 4% to 8%, depending on the relationship between the deceased and the beneficiary, with non-taxable threshold amounts.
Residents: Residents are taxed on their worldwide income. at progressive rates, from 23% to 43%.
Transaction costs are moderate to high in Italy
Total round-trip transaction costs in Italy range from 8.88% to 22.70%of the property value. Registration tax is 3% for main homes and 7% for second homes. Nonresident buyers pay a fixed registration tax of 7%. The real estate agent’s commission is between 3% and 8% plus 22% VAT; typically split between buyer and seller.
Italian law is strongly pro-tenant
Because of strongly pro-tenant landlord & tenant laws, the rental market is shrinking.
Rents: Rents can initially be freely negotiated, but increases are restricted. Landlords can only increase the rent after the initial 4-year contract.
Tenant Security: Tenants have the right to controlled rents, and effectively eight years or more of security of tenure. A landlord may only serve a disdetta - a registered letter of notice which must be sent at least six months before contract expiry - to coincide with the end of the standard 4 years. Failure to do so automatically renews the contract for another 4 years.
Slow economic growthThe 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.