Italy's housing market stable, but Covid-19 clouds outlook
Lalaine C. Delmendo | April 28, 2020
The nationwide house price index rose slightly by 0.31% in 2019 (unchanged when adjusted for inflation), according to the ISTAT. Quarter-on-quarter, house prices fell slightly by 0.2% in Q4 2019, but actually increased 0.22% in real terms.
- New house prices rose by 0.98% (0.68% inflation-adjusted)
- Existing house prices were up by a minuscule 0.1% (down 0.19% when adjusted for inflation)
In the country's eight metropolitan cities, the average price of new homes rose by 2.2% y-o-y to €4,470 (US$4,925) per square metre (sq. m.) in 2019, according to Centro Studi di Abitare Co.
During 2019, new home sales in Italy rose strongly by 9.8% from a year earlier, while sales in the metropolitan cities increased 5.9%. In contrast, the total number of dwellings in new residential buildings fell by 1.4% y-o-y in H1 2019, according to ISTAT.
Property sales and home prices are expected to fall sharply in the first half of 2020, as homebuyers cancel or delay their purchases until the coronavirus outbreak is contained and the overall economy gets back to normal.
Italy's economy grew by a miniscule 0.3% last year, after expanding 0.8% in 2018 and 1.7% in 2017, amidst trade tensions and a weaker investment outlook. The COVID-19 pandemic is expected to drag Italy's already ailing economy into recession this year.
Oxford Economics projects the eurozone's third largest economy to contract by 3% this year but other forecasts suggest that the economy could shrink by as much as 7%, despite the Italian government committing €25 billion to support the economy over the coming months, including measures to suspend first mortgage loan payments.
Gross rental yields in Italy range from low to moderate
Gross rental yields in the historical centre of Rome, Milan, Venice and Florence - i.e., the return you can earn from rent, compared to the purchase price of a property, before taxation, vacancy costs, and other costs - range from 2.4% to 4.4%, with yields in all four places about the same. Yields on 120 square metre (sq. m.) apartments are really low in Milan, yields on smaller apartments a better.
Prices of apartments. Apartments in central Rome cost around €6,500 to €8,000 per square metre. Apartments in the wealthy suburbs of Rome cost on average between €4,500 to €5,800 per sq. m. Milan is more expensive, with apartments in the centre costing €8,900 to €12,400 per sq. m., and those in the suburbs costing €6,600 to €7,700 per sq.m. Apartments in central Venice cost around €5,400 to €6,400 per sq. m., and in the suburbs between €4,500 to 4,900 per sq.m., with yields in the centre of around 3.7%. Yields in Florence average around 4.7%
Conclusion: Property prices in Italy are beginning to look attractive. But gross rental yields are still 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.
Italy’s economy is forever strugglingEven before the financial crisis, the Italian economy was growing sluggishly, with average GDP growth of 1.2% from 2001 to 2007.
It has been a miserable decade since then. Italy’s economy contracted by 1.1% in 2008 and by another 5.5% in 2009. The country went back to 1.7% growth in 2010 and 0.6% in 2011, but contracted by 2.8% in 2012 and 1.7% in 2013, according to the International Monetary Fund (IMF). Italy’s economy then grew by 0.1% in 2014, 0.9% in 2015, and 1.1% in 2016. Italy’s economy grew by a miniscule 0.3% last year, down from expansions of 0.8% in 2018 and 1.7% in 2017, amidst trade tensions and weaker investment outlook.
The COVID-19 pandemic is expected to drag Italy’s already ailing economy into deep recession this year, after the government imposed travel restrictions, and closed businesses except food and medicine for weeks. Oxford Economics projects the eurozone’s third largest economy to contract by 3% this year but other forecasts are more pessimistic, suggesting that the economy could shrink by as much as 7%.
The Italian government recently committed EUR25 billion to support Italy’s ailing economy in the coming months. Italy and eight other EU member states have pushed the EU to issue joint “corona bonds” – a move opposed by Germany and the Netherlands.
Italy’s budget deficit fell to 1.6% of GDP in 2019, the lowest deficit since 2007. This year, the government plans to raise the deficit above 2.5% of GDP to cushion the economy from the coronavirus outbreak.
Consumer prices in Italy rose slightly by 0.3% in February 2020, a slowdown from the previous year’s 1% inflation, according to ISTAT.
Unemployment was about 9.8% in January 2020, unchanged from the previous month but slightly down from an average of 11.4% from 2012 to 2018.