House prices in Italy stable at pre-crisis levels

Source: Global Property Guide

 

Unlike most countries in Europe, Italy did not experience sharp house price falls with the global financial crisis. After rising more than 70% from 1998 to 2008, the house price index has largely been unchanged since the crisis, falling 0.3% y-o-y to H1 2010 (the most recent data available), according to the Bank of Italy.   

Stability of house prices was also reflected in figures from Nomisma, an independent economic think-tank. The average existing house price in 13 major cities was largely unchanged (-0.6%) in the first half of 2010 compared with the second half of 2009. The price of new houses was also relatively stable (-0.5%) over the same period.

House price increases occurred in the cities of Cagliari (0.4%), Catania (0.2%) and Genoa (0.2%) from H2 2009 to H1 2010 – a contrast with 2009, when all cities registered price falls.

Sales volumes are starting to recover. Residential sales are projected to rise by 2.2% to around 620,000 units in 2010, according to Nomisma.  This, however, is significantly lower than the almost 850,000 units sold in 2007.

Real estate agents surveyed by the Bank of Italy are optimistic. Over the next two years, 61% expect the overall housing market to improve, 26% see no changes while the remaining 13% anticipate worsening conditions.  Nomisma expects house prices in the 13 major cities to remain stable in 2011. 

Yet robust house price increases are unlikely, due to weak economic growth, worsening public finances and political instability surrounding Prime Minister Silvio Berlusconi’s government.    

Low rates aren’t helping much, because the mortgage market is small

Italy’s mortgage markets are smaller than those in other European countries, at below 20% of GDP in 2008, significantly lower than the EU’s average of 50% of GDP (though strongly up from 10% of GDP in 2000).

That’s why though average housing mortgage loan rates in Italy fell to 3.64% in June 2009, after the ECB eased monetary conditions, the effect of interest rate reductions is likely to be small, since most households rely on personal savings for home purchases.

One of the main reasons for the underdevelopment of the mortgage market is the length and cost of the loan recovery process. From the time a borrower has defaulted, it takes around five to seven years until final settlement of the legal proceedings. This makes Italian banks cautious about extending mortgage loans.

From a low 3.6% for most of 2004 and 2005, average interest rates on new house purchases rose to 5.95% in August 2008. Partly as a result, in 2008 lending growth slowed to 2.5%.

Most Italian housing loans are now variable rate, making those households with mortgages relatively sensitive to interest rate changes (at the end of 2008, only 36% of outstanding housing loans were fixed rate loans, though this was more than double the level of 2005, largely because of interest rate rises between 2006 and 2008).

The sick man of Europe

From 2001 to 2007, the Italian economy grew by an average 1.1% per annum, one of the EU’s lowest growth rates.  It was dubbed the “sick man of Europe” (tugging away the title from Portugal).

Italy is still a laggard with 1.3% growth in 2010, lower than other major European economies such as Germany (3.5%), UK (1.8%) and France (1.6%). Italy’s economy is expected to expand by 1.3% in 2011.

Weakness in Italy’s economy is structural – its firms are too small to be globally competitive.
Italy’s relatively underdeveloped financial sector, combined with falling productivity, is hampering its recovery from the recession.

The government’s ability to pump-prime the economy is also extremely limited. There is huge public debt, at 119% of GDP by end-2010, one of the highest in Europe. The debt is expected to rise further in 2001, so Italy is vulnerable to speculative attacks and a crisis of confidence similar to Greece and Ireland.

The deficit, nonetheless, was at 4.6% OF GDP in 2010, below earlier predictions of 5% of GDP. It was also down from last year’s 5.4% deficit. The government is confident that it will be able to comply with the EU deficit limit of 3% of GDP by 2013.

Over-regulated private rental market

Private renting remains unattractive in Italy. Because of rent controls and other restrictions, rental properties have long yielded poor returns. 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 the 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 2007 and 2008, rents rose by only 2.55%, while residential property prices rose by an average of 4.6%.

Rental yields in Italy are generally low at 3% to 5%, based on Global Property Guide figures. In June 2009, apartments in the historical centre of Rome had gross rental yields of 4.3% – 5%, while apartments in Rome’s suburbs had yields ranging from 3.2% to 4.2%. Similar apartments in Milan had yields ranging from 3.3% to 4.9%.

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