Italy's house prices are falling in the countryside, rising in many cities
Prices of second-hand houses fell by about 3.8% to €1,799 (US$ 2,228.60) per square metre (sq. m.) during the year to Q1 2018, according to the real estate portal Idealista.it. In Rome, the country's capital, the average house price fell 3% during the year to Q1 2018.
Italy's long house-price decline
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.
Then the financial crisis hit, and unlike in Europe's more economically vibrant countries, house prices have not yet recovered. From H2 2008 to 2011, house prices fell 1.9% (-7.8% inflation-adjusted). The price drop worsened dramatically from 2011 to 2014, with the Euro crisis impacting Italy's sluggish economy, and the property tax Tassa sui Servizi Indivisibili (TASI) hindering any recovery. During this period, house prices fell by 13.5% (-16.3% inflation-adjusted), according to the ECB figures.
Cities up, countryside down
However property prices are now rising in cities, though still falling in the countryside. All regions, taken as a whole, saw annual house price declines in Q1 2018, according to Idealista.it. Marche had the sharpest price fall (6.5% y-o-y in Q1 2018). Other regions with large annual price declines included Molise (-6.1%), Umbria (-5.6%), Lombardy (-5.4%), Campania (-5.1%), and Piedmont (-5%).
In cities it was generally a different story. The city of Prato recorded the highest annual price rise of around 6.5% y-o-y in Q1 2018, followed by Verona (5.3%), Bologna (5.1%), Modena (4.6%), Brescia (3.5%), Florence (2.3%), Bolzano-Bozen (2.1%) and Salerno (1.5%). House prices in Milan rose slightly (by 0.6% y-o-y), while prices in Naples fell by 2.4%, and in Genoa declined by 6.2%.
Venice has the country's most expensive houses , with an average price of around €4,380 (US$ 5,426) per sq. m., followed by Florence with €3,519 (US$ 4,359) per sq. m., Bolzano-Bozen with €3,446 (US$ 4,269) per sq. m., Milan with €3,365 (US$ 4,169) per sq. m., Rome with €3,176 (US$ 3,934) per sq. m., and Naples with €2,723 (US$ 3,373) per sq. m.
The number of transactions rose in all the main cities, except in Bologna, according to the Agenzia delle Entrate. Bari had the largest increase, with sales surging by 15.1% y-o-y . Other cities with stronger sales included: Milan (8.1%), Verona (8%), Palermo (7.9%), Florence (7.8%), and Naples (7.4%). Turin (4.9%), Genoa (3.3%), and Rome (3%) had moderate sales increases.
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.
Italy's fastest economic growth in seven yearsItaly experienced its fastest economic growth in seven years in 2017, with 1.5% GDP growth - still modest. There's been strong domestic demand, improvements in the labour market, greater consumer confidence, and investment has improved, due to tax credits, favourable financing conditions, and rising exports, according to the European Commission (EC).
The Bank of Italy predicts 1.5% GDP growth for 2018, followed by above 1% in 2019 and 2020. "The rise in households’ disposable income and the decline in firms’ spare capacity mean that the improved outlook is increasingly translating into higher consumption and investment," said Bank of Italy Governor Ignazio Visco.
Even before the crisis, the Italian economy had already been growing sluggishly, with average GDP growth of 1.2% 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 0.6% in 2011, but 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. Italy's economy then grew by 0.1% in 2014, 1% in 2015, and 0.9% in 2016.
Consumer prices in Italy increased by only around 0.8% during the year to March 2018. Italy's unemployment rate stood at 11% in March 2018, unchanged from the previous month, according to ISTAT.
Hints of recovery in the Italian banking system
Italy's banking system has been in crisis, and there is still a possibility of collapse. However, recent developments suggest a recovery.
In a recent publication of the Bank of Italy, Deputy Governor Fabio Panetta stated that the Italian banking system is currently "on a recovery path". The banking sector's recovery has several aspects
- Private sector lending has been increasing since the end of 2016.
- The banking system's stock of non-performing loans (NPLs) has been declining rapidly, mainly due to the decreasing flow of new NPLs and the massive amount of NPLs being sold by banks.
- The exposure to domestic sovereign debt has fallen.
- On the liabilities side, there were more new bond issues in 2017 than redemptions, the first time since 2015.
The amount of bad loans held by Italian banks is high, but declining - €178 billion (US$ 220.51 billion) in December 2017, down from €215 billion (US$ 266.34 billion) at the end of 2016, according to the Bank of Italy.
"The Italian banking industry is emerging from a prolonged period of distress. The ongoing economic recovery and the resolution of important critical cases have drastically reduced tail risk and are helping to improve confidence," said Panetta.
"Critical cases" included the recapitalization of Banca Monte dei Paschi di Siena in 2017, the liquidation of Popolare di Vicenza and Veneto Banca, and the sale of four banks put into resolution in November 2015.
Monte dei Paschi (MPS), the oldest surviving bank in the world and the third largest bank in Italy, had been a focus of attention after news in December 2016 that it was running out of cash and might become insolvent within four months without fresh capital. In July 2017, the European Union approved a €5.4 billion (US$ 6.69 billion) state bailout of MPS after the latter agreed in undergoing a major revamp.
Italy’s public debt remains remarkably large, estimated at around 131.8% of GDP at the end of 2017, but it was slightly down from 132% of GDP in 2016. Italy has the second-highest public debt to GDP ratio in Europe, only next to Greece.
These improvements earned the country a recent credit upgrade from Standard & Poor's (S&P) from BBB- rating to BBB in October 2017.
A populist nightmare follows the March 2018 elections
On March 4, 2018, Italy held a general election. The election resulted in a hung parliament since no particular party won an overwhelming majority. At time of writing, two months after the election, it had jus been announced that a little-known law professor called Giuseppe Conte has been proposed as the head of the coalition cabinet between the far-right League led by Matteo Salvini and the post-ideological Five Star Movement led by Luigi Di Maio.
In other words, a populist nightmare - sending the Italian bond markets plunging and causing alarm in Brussels. Both allies are anti-EU, anti-immigrant, and are supported by ecosystems of fake news, pushing anything from anti-Semitic and racist propaganda about George Soros to claims about the Obama administration plotting to smuggle migrants from Libya to Italy, or anti-vaccine conspiracies. The Five Star Movement has been particularly good at presenting sanitised messages in mainstream media while allowing their social media followers to spread hate, racism and fake news.
The two parties' informal media networks are separate, but interconnected, and have links to far-right and pro-Russia propaganda sources in the West.
While populism is a stupid answer to real-world problems, experience elsewhere suggests that initially there is unlikely to be any impact on the housing market.