Italy’s sluggish housing market

Italy’s housing market is still weak, amidst falling demand and lackluster economic performance. During 2023, nationwide house prices rose by a minuscule 1.7% to an average of €1,840 (US$1,980) per square meter (sq. m.), according to real estate portal Idealista. When adjusted for inflation, house prices increased 1.1%.

Quarter-on-quarter, nationwide house prices were up by 1.6% (1.0% inflation-adjusted) in Q4 2023.

In Rome, Italy’s capital and largest city, homes prices stood at €3,017 (US$3,247) per sq. m., on average, during 2023, down slightly by 0.3% from a year earlier (-0.9% inflation-adjusted).

Milan, Bolzano, and Venice have the most expensive housing in the country, with average house prices currently at €4,986 (US$5,366), €4,520 (US$4,865), and €4,415 (US$4,752) per sq. m., respectively.

Italy’s house price annual change

Nationwide, the latest figures from the National Institute of Statistics (ISTAT) showed that the overall house price index rose by 1.8% during the year to Q3 2023, but fell by 3.6% when adjusted for inflation. Over the same period:

  • New house prices rose strongly by 8% (2.3% inflation-adjusted)
  • Existing house prices were up by a meager 0.5% (and dropped by 4.8% in real terms)

“The increase of HPI occurred in the context of a decline of the sales volumes (it was -10.4% the annual rate of change registered for the residential sector in the third quarter of 2023 by the Observatory of Real Estate Market belonging to Tax Office, up from -16.0% of the previous quarter), said ISTAT. “The stability on quarterly basis of the HPI was due to opposite dynamics as, on the one hand, the prices of new dwellings increased (+1.6%) while, on the other hand, those of existing dwellings decreased (-0.4%).”

Demand is slowing again. In Q1 2023 (the latest figures available in ISTAT), sales of real estate units and other kinds of property transactions fell to 210,691, down by 5% from the previous quarter and by 11% from a year earlier. Of which, transfers of residential properties accounted for about 93.8% share.

“Demand remains weak: opinions of a reduction in the number of potential buyers prevail over those of an increase. According to real estate agents, the difficulties in obtaining a mortgage for the purchase of a home are at levels that have not been recorded since the end of 2014,” according to the Banca D’Italia’s Q3 2023 Italian Housing Market Survey of 1,451 real estate agents.

“The prospects for real estate market trends continue to worsen with reference to both the home market and the national one,” added the central bank report.

During 2023, the eurozone’s third-largest economy grew by a paltry 0.7%, based on government estimates. “Internal demand will be mainly influenced by private consumption, thanks to the deceleration of inflation, associated with a gradual (albeit partial) recovery in wages and employment growth. Investments, although still growing, are expected to significantly slow down compared to the previous two years,” said ISTAT.

Italy’s economic performance is expected to remain weak in the medium term, with a projected real GDP growth rate of 0.9% this year and 1.2% in 2025, according to the European Commission (EC).

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.

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 2019, house prices fell by an annual average of 0.7% (-1.25% inflation-adjusted).

In the succeeding two years, house price growth gained some momentum, despite the Covid-19 pandemic. House prices rose by 1.52% (1.75% inflation-adjusted) in 2020 and by another 4% (0.44% inflation-adjusted) in 2021.

During 2022, despite the increase in nominal house prices of 2.7%, real figures declined by a huge 8.1%.

Italy House Price Indices graph

Local house price variations

Milan, Italy’s second most populous city, has recently overtaken Venice as the most expensive city in the country, with an average house price of €4,986 (US$5,366) per sq. m. in January 2024, up by 2% from a year earlier, according to national listing portal Idealista.

In Venice, known as the “City of Canals” and one of Italy’s most picturesque cities, the average house price rose slightly by 0.5% y-o-y to €4,415 (US$4,752) per sq. m. over the same period.

In Rome, Italy’s capital and largest city, home prices stood at €3,017 (US$3,247) per sq. m., on average, down slightly by 0.3% from a year earlier.

Italy Average House Prices graph

In other major Italian cities:

  • In Turin, the average price of homes was more or less unchanged from a year earlier, to €1,832 (US$1,972) per sq. m. in January 2024.
  • In Bologna, home prices increased by 4.6% y-o-y to €3,475 (US$3,740).
  • In Florence, house prices rose by 2% y-o-y to an average of €4,035 (US$4,343) per sq. m.
  • In Naples, Italy’s third biggest city, home prices increased strongly by 13.5% y-o-y to an average of €2,781 (US$2,993) per sq. m.
  • In Palermo, house prices increased by 5.1% y-o-y to €1,369 (US$1,473) per sq. m.
  • In Genoa, the average price of homes rose slightly by 1.5% y-o-y to €1,396 (US$1,503) per sq. m.
  • In Catania, house prices fell by 2.9% y-o-y to €1,204 (US$1,296) per sq. m.

Home sales falling again; demand shifting to the South, and larger homes

Real estate activity is slowing again. In Q1 2023 (the latest figures available in ISTAT), sales of real estate units and other kinds of property transactions fell to 2010,691, down by 5% from the previous quarter and by 11% from a year earlier. Of which, transfers of residential properties accounted for about 93.8% share.

All regions saw a decline in real estate sales during the period – Northwest (-16.5%), Centre (-16%), Northeast (-7.8%), Islands (-4.9%), and South (-4.6%).

Demand started to slow in the second half of 2022, amidst surging inflation, and has been weak since.

Despite this, Southern Italy continues to experience robust demand, mainly due to the rise of “smart working” and work-from-home setups, according to Idealista. Moreover, a recent report published by Gabetti, Professionecasa, and Grimaldi noted that demand is growing for the following types 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.

Italy Index of Real Estate Sales graph

New tax measures to buoy southern Italian homes market

In 2022, a new measure extended the benefit period for the 7% flat tax for pensioners who decide to retire to southern Italy from five years to nine years. The law, which has been effective since January 2019, requires the pensioner to 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.
  • A 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.

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 home 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.

Since 2021, more Italian towns started to offer houses for just over a dollar, including the Sicilian town of Castiglione di Sicilia, the Sardinian town of Bonnanaro, and the Litium town of Maenza. For instance in Castiglione di Sicilia, roughly 900 abandoned homes are currently offered for €1. Then in June 2023, the municipality of Ripacandida also joined the €1 house program.

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 three years. The specific process and requirements vary by municipality.

Also, even if there were interested buyers, some sales transactions did not materialize because owners of abandoned homes were impossible to track down as they had already migrated to other places.

Because of these obstacles, the €1 scheme has been less effective than it was initially planned.

To address this, a number of Italian towns are now introducing other ways to lure new residents. The towns of Carrega Ligure in Piedmont, Latronico in Basilicata, Biccari in Puglia, and Troina in Sicily have launched websites to showcase cheap, renovated homes. They have also opened real estate agencies to support interested homebuyers in contacting old owners who have abandoned their properties.

“We attempted in 2014 to sell stone mountain cottages for one euro, but over the past decades the owners had all migrated beyond the Alps and we couldn’t get hold of them. Also, the properties were divided among too many heirs which made things way too complicated,” said Carrega Ligure mayor Luca Silvestri.

“So we thought the best way was to help locals willing to offload their old homes by giving them an online platform, handled by village authorities, where they can either sell or rent the properties. Supply meets demand,” Silvestri added.

There are no restrictions on foreign ownership in Italy.

‘Superbonus’ tax credit scrapped

In 2023, the government announced the end of the popular Superbonus 110, which was introduced in 2020 to provide homeowners with a tax credit of up to 110% on the cost of upgrading their property. 

While the tax credit led to a surge in home renovations and helped to fuel the country’s economy after the effects of the Covid-19 pandemic, the tax measure proved to be too costly, with the government spending more than €110 billion (US$118.4 billion). It also pushed up building costs and been stained by widespread fraud.

In December 2023, the government agreed on a limited extension of the Superbonus subsidies for low-income households who had not completed home renovations last year. However, they otherwise faced having to draw on less generous 70% tax credits this year.

Residential construction activity continues to decline

In the first three quarters of 2023, authorized new residential buildings fell by 10% to 41,450 units as compared to the same period last year, in contrast to y-o-y growth of 0.1% in 2022 and 21.9% in 2021, according to ISTAT figures.

Likewise, the floor area of new residential building permits dropped 7.9% y-o-y to 3.63 million square meters (sq. m.) in Q1-Q3 2023.

Even before the Covid-19 pandemic, residential construction activity in Italy declined to an average of 49,900 dwelling permits annually in 2013-19, from 129,000 units in 2008-12 and 265,00 units in 2004-07.

Italy New Dwelling Permits graph

Good rental yields

In Italy, gross rental yields – the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs – are good, averaging 7.67% in Q1 2024, slightly up from 7.49% in Q3 2023, according to the recent study conducted by the Global Property Guide in January 2024.

By major cities, in Q1 2024:

  • In Rome, gross rental yields for apartments range from 5.82% to 9%, with a city average of 7.19%.
  • In Milan, apartments offer lower rental yields of between 3.4% and 6.55%, with a city average of 5.04%.
  • In Florence, rental yields for apartments range from 6.08% to 8.41%, with a city average of 7.5%.
  • In Turin, rental yields range from 5.76% to 11.29% in Q1 2024, with a city average of 7.87%.
  • In Genoa, apartment rental yields are much higher than the national average, at around 6.55% to 14.43%, with a city average of 9.7%.
  • In Palermo, rental yields are also high, ranging from 7.13% to 10.4%, with a city average of 8.63%.
  • In Naples, apartments offer rental returns ranging from 4.71% to 9.88%, with a city average of 7.01%.
  • In Catania, rental yields range from 7.56% to 9.6%, with a city average of 8.41%.

Despite good rental yields, round-trip transaction costs can be high on residential property in Italy and the country’s predatory taxation system makes things worse.

Rent controls

Despite good rental yields, private renting is unattractive for Italian landlords because of rent controls and other restrictions.

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 into account anticipated future rent increases, 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 2.4% over the same period.

However, in recent years, the gap has been narrowing because of the sluggish housing market, with house prices falling by a cumulative 21.4% (-36.2% inflation-adjusted) from 2011 to 2023. Over the same period, rents rose by 9% (but still declined by 11.6% when adjusted for inflation).

Italy Rent Index for Housing graph

Housing loan interest rates rising sharply

Interest rates for both new and outstanding housing loans in Italy are soaring, following the European Central Bank’s key rate hikes to rein in inflationary pressures.

In December 2023, the average interest rate for new housing loans in Italy reached 4.42%, up from 3.01% in the prior year and 1.4% two years ago, according to the ECB. Over the same period:

  • Floating rate and an initial rate fixation (IRF) of up to 1 year: 5% in December 2023, sharply up from 2.77% a year earlier and 1.32% two years ago
  • IRF of 1-5 years: 4.42%, up from 3.29% a year ago and 1.76% two years prior
  • IRF of 5-10 years: 4.53%, up from 3.5% in December 2022 and 1.98% in December 2021
  • IRF of over 10 years: 4.01%, up from 3.57% in the previous year and 1.38% two years ago