Italy's house prices are still falling, but at a slower pace

May 03, 2016


Italy house prices House prices are a two-sided coin.  If you're a buyer, you want them to fall.  If you're an owner, you want them to rise. 

So buyers in Italy will be happy that house prices have been declining for more than seven years, dropping by a total of around 16% from Q3 2008 to Q3 2015, or 23% after inflation, using European Central Bank (ECB) figures. Italy's house price index fell by 2.26% during the year to Q3 2015, according to the European Central Bank. When adjusted for inflation, the index fell by 2.44%. Nomisma's figures show a similar trend, with average property prices in the country’s 13 biggest cities falling 2.1% for new and 2.5% for existing homes.
Prices of second-hand houses in Italy fell by 5% to €1,973 (US$ 2,164) per square metre (sq. m.) during the last quarter of 2015, based on the figures from the real estate portal

In Rome, the country's capital, the average house price fell by 7.5% in 2015.

Towns with double digit price falls in 2015 included Pordenone (-174%), Vercelli (12.3%), and Barletta (-11.7%).  Major cities with large annual price drops include Genoa (-11.6%), Bari (-8%), Padua (-7.6%), and Palermo (-7%). The cities of Catania (-4.1%), Florence (-2.2%), Venice (-1.6%), and Bologna (-0.2%) also experienced price declines, but at lower rates.

On the other hand, house prices in Milan and Naples were virtually stable, with small increases of 0.7% and 0.1%, respectively.

The most expensive houses can be found in Venice, with an average house price of around €4,383 (US$ 4,808) per sq. m., followed by Milan with €3,489 (US$ 3,827) per sq. m., Bolzano with €3,420 (US$ 3,752) per sq. m., Rome with €3,396 (US$ 3,725) per sq. m., and Florence with €3,394 (US$ 3,723).

Sales continued to rise for the second consecutive year. In 2015, residential property sales were up by 6.5%, with about 445,000 residential properties sold, according to Agenzia delle Entrate, as reported by ANSA. Milan had the highest increase in house sales, with a 13.4% rise in 2015. Other cities with stronger sales included: Palermo (13%), Florence (8.9%), Turin (7.9%), Naples (6.6%), and Bologna (4.2%). Residential property sales in Rome also rose, but at a slower pace, by 0.8%.

According to Agenzia delle Entrate, the increase in home sales were brought by a significant improvement in the mortgage market, with the number of mortgages rising by 19.5% in 2015, to 193,000.

While the Italian property market is expected to have a better outlook in 2016 than in the previous years, growth is expected to be lower than that of the European average, in terms of prices and turnover.

“The way ahead is actually far from smooth and recovery will be slow. The scenario is complex and the dynamics of change may not be spectacular, but the signs are there and the fog is very gradually lifting,” said Nomisma CEO Luca Dondi. Nomisma predicts Italy's average residential house prices will rise by 0.5% in 2016, and by 1.7% in 2017.

The crisis' history; new tax measures to boost housing market

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. From H2 2008 to 2011, house prices fell 1.9% (-7.8% inflation-adjusted), using ECB figures.

The price drop worsened dramatically from 2011 to 2014, with the Euro crisis impacting Italy's sluggish economy, and the property tax TASI hindering any recovery. During this period, house prices fell by 13.5% (-16.3% inflation-adjusted), according to the ECB figures. Price declined continue even in 2015, with annual price drops averaging 2.93% during the first three quarters.

In 2016, new tax measures were launched by the government aiming to boost the country's property market:

  • TASI and IMU tax for principal homes (except luxury homes and castles) are now abolished.
  • 25% discount on the IMU tax for houses being lent on an "agreed rental"(canone concordato) contract - a contract with a minimum period of 3 years plus two years of automatic renewal, which also includes compliance to 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. Also, a further 10% decrease of IMU for building plots has been requested for 2016, after an earlier IMU reduction of around 5% in 2015.

Italy experienced 0.8% growth in 2015, after GDP falling 0.4% in 2014, after contracting by 1.7% in 2013 and 2.8% in 2012, according to the International Monetary Fund (IMF). In 2016, Italy's economic outlook is much better with an expected growth of 1.3%.

Faster recovery in the primary market

Italy price index homes

The primary housing market is recovering faster than the secondary market. In Q3 2015, the price index for new dwellings slightly dropped by 0.5% y-o-y (-0.68% inflation-adjusted), following annual price declines of 1.6% in Q2 2015, 2.09% in Q1 2015, and 1.39% in Q4 2014, according to ISTAT.

Existing dwellings' price index declined by 2.88% (-3.06% inflation-adjusted) during the year to Q3 2015. It followed after y-o-y price drops of 3.34% in Q2 2015, 4.14% in Q1 2015, and 4.55% in Q4 2014.

Housing loan rates remain low

Italy interest rates

From 2012 to 2014, the ECB rate was reduced five times to reach a record low of 0.05% in September 2014. The ECB rate has been unchanged since then.

The average interest rate for new housing loans was at a historic low of 2.49% in December 2015, below the 2.83% average in 2014, 3.5% in 2013, and 3.69% in 2012, according to the Bank of Italy.

Housing loan rates in Italy in December 2015:

  • Fixed rate up to 1 year: 1.97%
  • Fixed rate 1-5 years: 2.22%
  • Fixed rate 5-10 years: 2.72%
  • Fixed rate over 10 years: 2.84%

Small mortgage market; a weak legal system

The mortgage market remains small, though the ratio of outstanding mortgage to GDP has shown significant growth, climbing from 7% in 1997 to more than 22.2% of GDP in 2014, according to the European Mortgage Federation (EMF).

Italy outstanding housing loans

As of Q3 2015, outstanding housing loans in Italy was around €387.92 billion, according to the Bank of Italy.

The underdevelopment of the mortgage market is partly attributed to the length and cost of the loan recovery process, which makes 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).

That means that though most housing loans are now variable rate (only 36% of Italy's outstanding housing loans were fixed rate at end-2008), interest rate reductions tend to have a relatively small effect on the market.  However things could be changing, as in 2010 the takeup of mortgages expanded by around 26% when interest rates on new house purchases fell to historical lows of 2.7%.  Nevertheless after huge growth in 2010, the demand for new loans for house purchases slowed sharply in 2011 and declined by 0.5% in 2012, 1.2% in 2013 and by another 0.6% in 2014, despite generally very low interest rates. In 2014, the total outstanding housing loans in Italy amounted €390.92 billion, according to the Bank of Italy.

The demand for housing loans was expected to rise in 2015, due to changes in taxation on home sales introduced by the government in the previous year, coupled with the new lending scheme sponsored by the Italian Banking Association and Cassa Depositi e Prestiti, which allocates €2 billion to new originations for house purchases or rebuilding.

Rental returns are poor, landlordism unattractive

Private renting is unattractive for Italian landlords, with very poor returns on rental properties, caused by rent controls and other restrictions.

In Rome's historical centre, rental yields on apartments range from 3% to 4.02%, with small apartments earning higher returns than larger ones, according to the Global Property Guide research conducted in June 2015.

In the suburbs, rental yields range from 2.95% (for 200 sq. m. apartments) to 4.37% (for 45 sq. m. apartments), with large apartments clearly yielding poorer investment returns.

A 120 sq. m. apartment located in the historical centre of Rome can be rented for €1,920 (US$ 2,087) per month. Rents in the suburbs of Rome range from €12 (US$ 13) to €16 (US$ 17) per sq. m. per month, or around €1,439 (US$ 1,564) per month for a 120 sq. m. apartment. In Milan, a 120 sq. m. apartment can be rented for around €1,746 (US$ 1,898) per month. 

In Milan, gross rental yields were between 3.53% and 3.88%, with no clear correlation between size of apartment and rental yields.

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.

Most Italians are homeowners

Italy homeownership

Italy is a nation of home-owners. Based on the figures from ISTAT's Population Housing Census in 2011, around 71.9% of the country's total households are owner-occupiers, an increase from 59% in 1980.

Among Italy's regions, the North-East had the highest homeownership rate of around 73.8%. It was followed by the Centre with 72.9%, the North-West with 72.1%, and the Islands (consisting of Sardinia and Sicily) with 72%. The South had the lowest homeownership rate at around 68.9%.

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, and continued rent controls

Italy returned to growth in 2015; a looming banking crisis

Italy gdp inflation

In Q4 2015 Italy delivered its fastest expansion since Q2 2011, with 1% growth, following growth rates of 0.8% in Q3, 0.5% in Q2 and 0.1% in Q1 2015.

The Italian government raised its growth forecast for 2016 from 1.4% to 1.6%. The European Commission (EC) has a slightly lower growth forecast at around 1.4% in 2016, but expects Italy to continue to grow in 2017, by 1.3%.

The Italian economy has been in recession for the past three years, contracting by 0.4% in 2014, 1.7% in 2013, and 2.8% in 2012, due to the euro zone crisis. The economy contracted by 1.1% in 2008 and by another 5.5% in 2009. The country went back to 1.7% growth in 2010, but this did not last.  The latest period of economic decline was preceded by meagre growth of 0.6% in 2011, according to the International Monetary Fund (IMF).

Even before the global crisis, the Italian economy had already been growing sluggishly, with average GDP growth of 1.26% from 2001 to 2007.

Italy is the euro zone’s third largest economy with a total population of almost 61 million and a GDP per capita of US$ 35,665 in 2015. However, the country’s public debt is remarkably large, estimated at around 132.8% of GDP in 2015. Since 2007, public debt in Italy has steadily increased, rising from 103% of GDP to 127% of GDP in 2012 and to more than 130% of GDP in 2013 and 2014. Italy currently has the second-highest public debt to GDP ratio in Europe, only next to Greece.

Aside from its huge public debt, Italy's banking system is on the verge of collapse. The number of bad loans held by the country's banks reached €200 billion (US$ 220 billion) in December 2015 or about 17% of GDP. Major banks have already felt its impact, with banking stocks dropping 28% since January 2016. Shares of major banks Monte dei Paschi di Siena and Banca Carige, suffered huge declines since the start of 2016, by 56% and 58%, respectively. 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.

The country will have a higher fiscal deficit in 2016, at around 2.4% of GDP, due to the 2016 budget, which will introduce tax-cuts to boost the economy. Italy's 2016 budget, supported by PM Renzi, was met with criticisms from the European Commission (EC) and Germany. The EU is concerned that Italy is slowing the pace of its fiscal tightening, despite its huge public debt. However PM Renzi has argued that the country should take advantage of the flexibility of the eurozone fiscal rules, which allow higher deficits in exchange for infrastructure investment and structural reforms that improve growth.

The government's 2016 budget was approved by parliament in December 2015.

In December 2015, Italy's unemployment rate remain unchanged at 11.4%, a three-year low, according to ISTAT. Consumer prices in February 2016 fell by 0.3%, following  a 0.2% inflation rate in 2015.

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