Italian property market: Housing market still in the grips of the economic doldrums

Government crisis, debt crisis, economic crisis or banking crisis – Italy is certain to regularly be in the public limelight. By contrast, it would seem as if there is far less coverage of the property market between North Italy and Sicily than there is of the housing markets in other European countries. That said, the market is not really suited as the basis for snappy headlines. The past saw few excessive price hikes just as there were few sharp price corrections. However, the minor press coverage should not delude one into thinking that the property market is not just as important for macroeconomic developments or the financial system as it is in other nations. Meaning there can be no harm in casting a glance at the state of the Italian market for residential properties.

About 20 years ago, with the introduction of the single European currency already on the horizon, property mortgages rates in Italy dropped noticeably, as they did in other southern European countries. Thus incentivized, property market demand rocketed some 75 percent within the space of a decade. While that is a powerful increase, it is far less than in France or Spain, for example. The meagre competition in the financial sector and the arduous nature of valorizing loan collateral made credit more expensive and prevented high mortgages. The two factors dampened the property boom, but also private households acquiring debt. When the international financial crisis broke out this was an advantage; a market correction such as was seen in other housing markets did not materialize. Two recessions and the resulting sharp rise in unemployment broke the market’s resistance, however, and between 2012 and 2015 squeezed the level of prices down by 15 percent overall. The number of sales dropped appreciably, reflecting eroded demand. Prices did not fall further only because at that time new building activities declined significantly, sagging to a seventh of the pre-crisis level.

In the course of the last year, house prices have steadied again thanks to purchase demand starting to rise. This can be seen above all compared to the fact that transaction figures have now recovered by over 30 percent since the crunch. The market has been spurred above all by affordability clearly improving, a trend that has benefited from the tangible drop in purchase prices, slowly rising incomes and in particular the sharp decrease in mortgage rates. The current burden which a property purchase poses on income has therefore fallen to an all-time low. The relation of purchase prices to income has reached a very favourable level in a long-term comparison. Added to which there are tax breaks for first-time buyers, above all as in 2016 the property tax was repealed.

Are the higher sales figures and the halted price decrease hopeful harbingers for a turnaround in the property market? Little indicates this is happening: Macroeconomic growth of not even one percent a year is simply too weak to lower the high unemployment, in particular in south Italy. Moreover, the high jobless rate of 40 percent among young Italians is blocking a new generation of first-time buyers emerging. The hard-hit construction sector, otherwise a strong employer, contributed greatly to the rise in unemployment. It is not very probable that in a weak market environment manifest positive employment will be prompted by rising house-building activities. And as a highly-indebted country Italy does not have the latitude for growth-driving stimuli. Then the profound difficulties in the Italian banking system come into play, with a double-digit share of distressed receivables. One positive is that as a whole private households bear only a moderate level of debt. Since 2009 the volume of non-performing loans has increased by a factor of three, however, and this could in the future mean that foreclosures strain the housing market more than before.

If in such a situation interest rates climb and properties in the housing market become less affordable, demand will dwindle again. For this reason, our main scenario for the Italian housing market is one of continued stagnation. However, in the weak economic climate the market remains prone to renewed setbacks. Less probable is an enduring climb in transaction numbers and prices. Temporarily, however, this could occur owing to purchasing being brought forward in expectation of rising interest rates.

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