Italy’s housing market remains stable

Lalaine C. Delmendo | April 01, 2021

Italy’s housing market remains steady, despite the pandemic-induced recession. During the year to February 2021, nationwide house prices rose by 1.6% to an average of €1,719 (US$2,055) per square metre (sq. m.), according to real estate portal Idealista. When adjusted for inflation, house prices increased 1.1%.

In Rome, Italy’s capital and largest city, homes prices stood at €2,848 (US$3,404) per sq. m., on average, in February 2021, up 0.6% from a year earlier (unchanged when adjusted for inflation).

Italy house prices

“Italy’s real estate market has withstood the impact of the pandemic well, under the pressure of changed housing needs triggered by the crisis, and with interest rates at historic lows,” said Vincenzo De Tommaso of Idealista.

Diletta Giorgolo Spinola of Sotheby’s International Realty attributes the housing market’s resilience to historically low borrowing costs. “People are more committed to buying at the moment,” Spinola said. “Property seems to be a safe place to put money, and people are giving more thought to property in places where life is very sustainable.”

The latest figures from National Institute of Statistics (ISTAT) show the nationwide house price index rising by 1% during the year to Q3 2020, and by 1.5% when adjusted for inflation. Over the same period, new house prices rose by 3% (3.5% inflation-adjusted) while existing house prices were up by 0.7% (1.2% when adjusted for inflation).

Venice and Milan have the most expensive housing in the country, with average house prices of €4,467 (US$ 5,340) and €3,994 (US$4,774) per sq. m., respectively.

“The prospects for 2021 are marked by cautious optimism. At the first signs of economic recovery, the real estate market has always been quite quick to recover,” De Tommaso noted.

However, the COVID-19 pandemic has taken a heavy toll on the country as a whole, with 102,000 deaths as of mid-March 2021. Italy was the first Western nation to implement a national lockdown. The government eased restrictions in June 2020, but reinstated them in November due to an infection surge. Recently, a travel ban between different regions and provinces was extended until March 27.

The pandemic dragged Italy into deep recession.  GDP fell by almost 9% in 2020, the steepest decline since World War II, according to ISTAT.

The eurozone’s third largest economy is projected to grow by 3.4% this year and by another 3.5% in 2022, according to estimates released by the European Commission.

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, and unlike in Europe’s more economically vibrant countries, house prices have not yet recovered.

Italy house price indices

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.

From 2015 to Q3 2020, house prices were steady, but in real terms, prices were down by almost 3%.

Local house price variations

Venice is the most expensive city in Italy, with an average house price of €4,467 (US$ 5,340) per sq. m. in February 2021, down by 0.7% from a year earlier, according to national listing portal Idealista.

In Rome, Italy’s capital and largest city, home prices stood at €2,848 (US$3,404) per sq. m., on average, in February 2021, up 0.6% from a year earlier.

Italy average house  prices

In other major Italian cities:

  • In Milan, Italy’s second most populous city, home prices surged 11.8% y-o-y to an average of €3,994 (US$4,774) per sq. m. in February 2021.
  • In Turin, the average price of homes rose by 2.2% to €1,606 (US$1,920) per sq. m.
  • In Bologna, home prices increased slightly by 0.7% y-o-y to €3,060 (US$3,658).
  • In Florence, house prices fell slightly by 0.4% y-o-y to an average of €3,947 (US$4,718) per sq. m.
  • In Naples, Italy’s third biggest city, home prices fell by 5.3% y-o-y to an average of €2,221 (US$2,655) per sq. m.
  • House prices also fell by 5.5% to €1,254 (US$1,499) in Palermo; by 4.7% to €1,190 (US$1,422) in Catania; and by 3.4% to €1,394 (US$1,666) in Genoa.

Demand is shifting to the South

Residential property transactions in Italy fell by 13.9% during 2020 to 374,545 units, according to the Italian Revenue Agency. The average time to sell remained stable at 4.5 months.

Southern Italy is actually experiencing an increase in demand, mainly due to the rise of “smart working” and work-from-home setup, according to Idealista.

“The ongoing pandemic has changed the housing interests of Italians, not only from the point of view of the choice of the type of property, but also in terms of geolocation,” said Idealista.

Eight of the 10 provinces that saw the biggest increase in demand in the first three quarters of 2020 are in the South. Barletta-Andra-Trani recorded the biggest rise, with 60% more requests compared to the beginning of 2020, followed by Rieti (56%), Agrigento (55%), Reggio Calabria, and Enna (both with 50% rise), Nuoro (45%), Catanzaro (43%), Ascoli Piceno (41%), Catania (40%), and Matera, Potenza, and Fermo (with a 36% increase each).

However even before the pandemic, several measures, such as the introduction of tax privileges to pensioners who decide to retire in Southern Italy, as well as the continued increase in the number of Italian towns (mostly in Sicily) selling homes for €1, have buoyed housing demand in the South.

Moreover, a recent report published by Gabetti, Professionecasa and Grimaldi noted that demand is growing for the following type of properties:

  • Multifunctional homes, with larger dimensions and modular spaces adapted for remote working;
  • Properties with outdoor spaces, gardens, or terraces;
  • Condo units with services, such as gym, garage, and multifunctional rooms, and;
  • Bigger-sized second homes.

Italian towns selling homes for €1 continue to rise

Since early-2016, a growing number of small, rural towns in Italy have been selling abandoned, dilapidated homes for €1 to international buyers, in an effort to repopulate the towns.

“In the last 40 years people, especially young people, left the countryside to find work in bigger cities, and those small villages like Mussomeli became abandoned all over Italy,” said Italian real estate expert Stefan Neuhaus.

The Italian towns currently offering €1 homes include: Ollolai (Sardinia), Sambuca (Sicily), Cantiano (Le Marche), Mussomeli (Sicily), Zungoli (Campania), Gangi (Sicily), Bivona (Sicily), Cammarata (Sicily), Borgomezzavalle (Piedmont), Nulvi (Sardinia), Fabbriche di Vergemoli (Tuscany), Oyace (Aosta Valley), Troina (Sicily), Delia (Sicily), Taranto (Apulia), and Cinquefrondi (Calabria), among others.

However, there is a catch. Prospective buyers must agree to repair and restore the property, which could cost a lot. In addition, buyers must comply with a number of conditions. First, buyers must provide an insurance deposit of between €1,000 and €5,000 depending on the town. Then, buyers need to submit their renovation plans to the town council, which must be completed within a set time frame, typically in a period of three years. The specific process and requirements vary by municipality.

New tax measures boost demand for southern Italian homes

From January 2019, pensioners who decide to retire to southern Italy will receive tax privileges. More specifically, the pensioner should transfer his tax residence to an Italian municipality with no more than 20,000 inhabitants located in one of the following regions: Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise, or Puglia.

The new rule applies a substitute tax of 7% on pensions and all other foreign incomes. Other benefits include an exemption from payment of tax on the value of real estate located abroad (IVIE) and the tax on the value of financial assets held abroad (IVAFE).

Earlier, other tax measures were launched by the government:

  • Abolition in 2016 of the Tassa sui Servizi Indivisibili (TASI) and Imposta Municipale Propria (IMU), which are taxes on principal homes (except luxury homes and castles).
  • 25% discount on the IMU tax for houses being lent on an "agreed rental" (canone concordato) contract for a minimum of 3 years plus two years of automatic renewal which complies with 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.

Residential construction falling

Authorized new residential buildings fell by almost 14% to 23,325 units in H1 2020 from a year earlier, according to ISTAT. Likewise, the floor area of new residential building permits plunged 16.2% y-o-y in H1 2020.  There has been a continued decline in new construction (an average of 49,900 dwelling permits annually 2013 to 2019, down from 129,000 units annually 2008 to 2012 and 265,00 units annually 2004 to 2007).

Italy new dwelling permits

Poor rental yields make private letting unappealing

Private renting is unattractive for Italian landlords. There are very poor returns on rental properties because of rent controls and other restrictions.

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 4.4%. Yields in Rome are lower than in Milan, according to Global Property Guide research. Yields on 120 square metre (sq. m.) apartments are really low, while yields on smaller apartments are a little better.

Round trip transaction costs can be very high on residential property in Italy and the country’s predatory taxation system makes things worse.

Typical rentals:

Rome: A 120 sq. m. apartment located in the historical centre of Rome can be rented for €2,584 (US$3,089) per month. Monthly apartment rents outside Centro Storico range from €17 (US$20) to €22 (US$26) per sq. m., or around €2,198 (US$2,627) per month for a 120 sq. m. apartment.

Milan: In the historical centre of Milan, a 120 sq. m. apartment can be rented for about €2,837 (US$3,391) per month. The same-sized apartment can be rented for €2,671 (US$3,193) per month near Fiera, Milan and for €2,717 (US$3,248) per month in Moscova-Repubblica.

Venice: A 120 sq. m. apartment can be rented for €2,147 (US$2,566) 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.

Housing loan interest rates are at historic lows

The average interest rate for new housing loans in Italy is very appealing, falling to a record low of 1.67% in January 2o2o, from 1.87% a year earlier, according to the European Central Bank (ECB).

Italy interest rates

In January 2021 these were housing loan rates in Italy:

  • Initial rate fixation (IRF) up to 1 year: 3%, down from 3.52% a year earlier
  • IRF of 1-5 years: 2.41%, slightly down from 2.52% a year earlier
  • IRF of over 5 years: 1.67%, down from 1.87% a year ago

Italy’s mortgage market is small

Italy’s mortgage market is still small, with outstanding mortgages equivalent to less than 25% of GDP in 2020, less than half of EU 28’s average of about 47% of GDP.

This is largely attributable to the length and cost of the loan recovery process, which makes Italian banks very 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 the tax benefits, according to the Royal Institution of Chartered Surveyors (RICS). The take-up of mortgages expanded sharply when interest rates on new house purchases fell to historical lows of 2.7% in 2010, but since then the demand for new loans for house purchases has slowed sharply, despite generally very low interest rates.

Italy outstanding housing loans

In January 2021, outstanding housing loans rose by about 2% to €392.74 billion (US$469.45 billion) from a year earlier, up from an annual average growth of just 0.7% in 2012-2020, according to the ECB.

In March 2020, the country temporarily suspended mortgage payments across Italy as part of measures to soften the economic blow of the pandemic on households.

Why do more Italians now live in their own homes than in the 1980s?

Currently, around 72% of the country’s total households were owner-occupiers, an increase from 59% of total households in 1980, according to Eurostat figures.

Sardinia and Sicily have most owner-occupiers, at around 84.1%. The South and North-West regions have relatively lower rates of owner-occupiers at 78.7% and 77.7%, respectively.

Italy homeownership

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, making being a landlord unattractive.

Italy’s economy is forever struggling

Italy has never fully recovered from the 2008-09 global crisis and the COVID-19 pandemic has added another blow to the country’s still weak economy. 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. The economy contracted by 1% in 2008 and by another 5.3% in 2009. The country went back to 1.7% growth in 2010 and 0.7% in 2011, but contracted by 3% in 2012 and 1.8% in 2013, according to the International Monetary Fund (IMF).

Italy’s economy then grew by 0.1% in 2014, 0.8% in 2015, 1.3% in 2016, 1.7% in 2017 and 0.8% in 2018. Italy’s economy grew by a minuscule 0.3% in 2019, amidst trade tensions and weaker investment outlook.

The eurozone’s third largest economy is projected to grow by 3.4% this year and by another 3.5% in 2022, according to estimates released by the European Commission – yet still not enough to offset last year’s sharp decline.

Italy’s budget deficit climbed to about 10.8% of GDP in 2020 due to stimulus measures to cushion the impact of the pandemic. Italy’s deficit is expected to fall to 9% of GDP this year.

Public debt increased sharply to 158% of GDP in 2020, from 134.8% of GDP in 2019, 135.4% in 2014 and 116.6% in 2009. The country’s debt pile is expected to fall this year to about 155.6% of GDP.

Italy gdp inflation

Consumer prices in Italy rose by 0.6% y-o-y in February 2021, up from the previous year’s 0.3% rise.

Unemployment was 9% in 2020, down from 9.8% in the previous year and from an average of 11.4% from 2012 to 2018. Youth unemployment remains high at 29.7%.

New Italian PM Draghi pushes for vaccine embargo

Mario Draghi, a former president of the European Central Bank and an ex-governor of the Bank of Italy, took over the premiership in February 2021 when a coalition of the radical 5-Star Movement and centre-left Democratic Party fell out on how to spend the EU’s €200 billion coronavirus recovery funds. He has the support of all major parties in parliament for his recovery plan.

Nicknamed “Super Mario”, Draghi earned impeccable internationalist credentials during his stint as ECB president, and is widely credited with saving the euro currency after the Eurozone debt crisis.

Italy Gross government

Oddly, Draghi is now the first leader to initiate an export control system that critics perceive as vaccine nationalism. Draghi, without any objection from the EU, blocked a consignment of more than 250,000 doses of AstraZeneca vaccines destined for Australia. The move underscores a growing frustration in the EU about the slow rollout of its vaccination drive and the shortfall of promised vaccine deliveries, especially from AstraZeneca.


Sources:

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