Italian house price falls continue, amidst prolonged recession

May 15, 2013


Italy house prices

Italy’s house price index fell by 4.64% in 2012, according to Eurostat (-6.94% after inflation).  This follows almost four years of house price falls.

From 2000 to H1 2008, house prices surged by 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).

In the fourth quarter of 2012, residential property transactions fell by 30.5% from the same period last year. For the whole year of 2012, property transactions fell by 25.8% y-o-y to 444,000 units, according to ANSA.

This is happening despite falling average interest rates on housing loans in Italy: 

  • The interest rate for new housing loans with initial rate fixation (IRF) of up to 1 year was 3.47% in March 2013, down from 3.9% in March 2012.
  • The average interest rate for new housing loans with IRF of between 1 and 5 years was 4.05% in March 2013 from 4.78% from a year earlier.
  • Over the same period, the interest rate for new housing loans with IRF of between 5 and 10 years was 4.46%, down from 5.14%.
  • The interest rate for new loans with IRF of more than 10 years was 4.55% in March 2013, down from 5.21% in March 2012.
  • The average interest rate for outstanding housing loans also dropped to 3.01% in March 2013 from 3.5% in the same period last year.

Despite falling mortgage interest rates, total outstanding housing loans dropped 0.8% y-o-y to €364.6 billion in March 2013, according to the Bank of Italy.

With the economy still mired in deep recession, the Italian housing market is expected to remain depressed in 2013, according to local property experts.

The economy contracted by 2.4% in 2012, after registering real GDP growth rates of 0.4% in 2011 and 1.7% in 2010.  Real GDP is expected to decline by 1.4% in 2013 before rising by 0.7% in 2014, according to the National Institute for Statistics (ISTAT).

Landlordism is unattractive in Italy

Renting is unattractive for Italian landlords, because of rent controls and other restrictions. Rental properties have long yielded poor returns. Properties generally have low yields of 3% to 5%, according to Global Property Guide.
In June 2010:

  • apartments in the historical centre of Rome had rental yields of 3.45% - 4.40%
  • apartments in Rome’s suburbs had yields ranging from 3% to 4.5%
  • `apartments in Milan had yields ranging from 3.39% to 3.76%

Italy  house rent consumer prices graph

When a law was passed in 1978 encouraging landlords to sell, a lot of landlords grabbed the chance.

The standard 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 the 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%.

Interest rates are low in Italy

The average interest rate for new housing loans was 2.92% from May 2009 to March 2011, but then rose to 3.42% in September 2011.

Housing loan rates in Italy, September 2011:

Italy interest rate
  • Fixed rate up to 1 yr: 3.14%
  • Fixed rate 1-5 yr: 3.58%
  • Fixed rate 5-10 yr: 4.08%
  • Fixed rate 10 yr +: 4.64%.

Italy’s interest rates reflect European Central Bank rates. Rising inflation pushed the ECB’s key rate to 1.25% in April, and 1.50% in July 2011. In November 2011, ECB’s base rate eased back to 1.25%.

Italians have little housing debt

Yet the effect of interest rate reductions is likely to be relatively small in Italy, even though most Italian housing loans are variable rate (only 36% of outstanding housing loans were fixed rate at end-2008).

Italy outstanding mortgage lending graph

That’s because Italy’s mortgage markets are smaller than those in other European countries. Outstanding mortgages were 22% of GDP in 2010, up from 7% in 1997, significantly lower than the EU’s average of 50% of GDP

Cumbersome legal processes make 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). Most households rely on personal savings for home purchases.

Italy’s homeownership rate is high

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, enabling landlords to sell, and continued rent controls

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