Italy's house prices are falling in the countryside, rising in many cities

June 29, 2018

Italy house prices When will it end? Italy faces Italy´s house prices have been declining for nine years, falling by around 17.5% (-25.1% inflation-adjusted) from Q3 2008 to Q4 2017, according to the European Central Bank (ECB) figures. In Q4 2017, Italy´s house price index fell by 0.29% y-o-y, according to the ECB. When adjusted for inflation, the index fell by 1.21%.

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 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

Italy price index new existing dwellings

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 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.

Across Italy, the price of newly-built properties have fallen slightly less (-0.92% inflation-adjusted) than old properties (-1.43% inflation-adjusted).

New tax measures to boost housing market

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

  • Tassa sui Servizi Indivisibili (TASI) and Imposta Municipale Propria (IMU) tax for principal homes (except luxury homes and castles) 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 is trying to persuade wealthy individuals to transfer their tax residence in Italy, giving them an option to apply for an flat annual tax payment of €100,000 (and an additional €25,000 for each family member) as a substitute tax on foreign income. This was included in Italy´s 2017 Budget Law,.

Poor rental yields make private letting unappealing

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, gross rental yields on apartments range from 2.37% to 3.78%, with smaller apartments earning higher returns than larger ones, according to the Global Property Guide research conducted in July 2017. In Rome´s other historical areas near Centro Storico, apartment rental yields range from 3.78% (for 40 sq. m. apartments) to 3.87% (for 120 sq. m. apartments).

Gross rental yields in the historical centre of Milan were between 2.99% and 3.88%, with larger apartments yielding poorer investment returns. In Milan´s Citta Studi district, rental yields are much higher compared to the historical centre, ranging from 4.55% to 4.84%.

Typical rentals:

Rome: A 120 sq. m. apartment located in the historical centre of Rome can be rented for €1,999 (US$ 2,473) per month. Monthly apartment rents outside Centro Storico range from €17 (US$ 21.03) to €22 (US$ 27.21) per sq. m., or around €2,020 (US$ 2,499) 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 €2,410 (US$ 2,981) per month, while the same-sized apartment can be rented at €1,478 (US$ 1,828) per month in Citta Studi, Milan.

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 rates at historic lows

Italy interest rates

The average interest rate for new housing loans is at a historic low at 1.92% in January 2018, down from the 2.08% in 2017, 2.49% in 2016, 2.82% in 2015, 3.49% in 2014, and 3.7% in 2013, according to the Bank of Italy.

Housing loan rates in Italy in January 2018:

  • IRF up to 1 yr: 1.58%
  • Floating rate over 1 yr: 2.12%
  • Interest rate on new loans for house purchase: 1.87%
Italy outstanding housing loans

Mortgage market stagnant

Despite the low interest rates Italy´s mortgage market is still small, with outstanding mortgages worth 22% of GDP in 2016, less than half of EU 28´s average of 47.1% of GDP, according to the European Mortgage Federation (EMF). However outstanding mortgages have risen from only 7% of GDP in 1997.

The underdevelopment of the mortgage market is partly attributable 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). The takeup 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.

That mortgage market´s small size means interest rate reductions tend to have a relatively small effect on the Italian housing market, even though that though 50% of housing loans were variable rate in 2015. 

In 2015, outstanding residential loans rose slightly, by 0.9%, followed by a 1.6% increase in 2016.The rise of demand was attributed to the changes in taxation on home sales introduced by the government ithe previous year, coupled with the new lending scheme sponsored by the Italian Banking Association and Cassa Depositi e Prestiti, which allocated €2 billion to new originations for house purchases or rebuilding. 

A nation of homeowners

Italy homeownership

Most Italians are home-owners. In 2016, around 80% of the country´s total households were owner-occupiers, an increase from 59% of total households in 1980, according to ISTAT figures.

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

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.

Italy´s fastest economic growth in seven years

Italy gdp inflation

Italy 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.


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