With its gross domestic product declining, and unemployment rising, the Italian real estate market is expected to decline significantly in the second half of 2009. Known as the “sick man of Europe ,” experts believe that Italy’s underdeveloped financial sector will slow down its recovery from the global recession . For more on this, see the following article from Global Property Guide.
Italy’s housing market has remained resilient, despite falling markets in most other developed countries. House prices in H1 2009 rose by 3% from a year earlier, according to the index published jointly by the Bank of Italy (BoI) and the National Statistical Institute (Istat). When adjusted for inflation , house prices rose by 1.9%.
Italian house price rises peaked in 2002, rising 12% (9.2% in real terms) from a year earlier. House prices rose by an average of 6.5% p.a. (4.1% in real terms) from 2003 to 2006, then by an average 4.6% p.a. (2% in real terms) from 2007 to 2008.
The resilience of Italy’s housing market is attributable to what was formerly considered a weakness, its underdeveloped mortgage market. Despite having the fourth largest economy in the EU, Italy’s mortgage market is around 20% of GDP, significantly below the EU average of 50% of GDP.
Italy’s housing market has been shielded from the global credit crunch afflicting most countries. Prudent loan practices prevented the development of housing bubbles similar to Spain, Ireland or the UK.
Trouble on the horizon
However, Italy’s resilience may not last for long. Italy’s GDP is expected to contract by as much as 5.5% in 2009, its worst recession since World War II, after shrinking 1% in 2008. Unemployment is anticipated to rise to 10.7% by the end of 2010, from 6.8% in 2008.
Property prices are expected to drop by 7% to 8% starting the second half of 2009, says Nomisma, an economic think-tank, noting that residential sales dropped by 15% in 2008. Housing sales are also expected to contract a further 8% to 10%. Nomisma expects the property market to stabilize in 2010.
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
Italy’s GDP is expected to contract by 5.5% in 2009. In 2008, Italy’s economy shrank by “only” 1%, outperforming other major European countries such as UK, Germany, France and Spain.
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’s unemployment rate was relatively high in 2008 at 6.8%, and is expected to rise to 8.4% in end-2009 and 10.7% in 2010.
Italy’s relatively underdeveloped financial sector, combined with falling productivity, may hamper its recovery from the recession. The government’s ability to pump-prime the economy is also extremely limited. There is huge public debt , at 106% of GDP in 2008. Italy’s ratio of public debt to GDP, already the highest in Europe, is projected to rise to 117% by end-2010.
The budget deficit is also expected to rise to 4.7% of GDP in 2009 and 5.9% of GDP in 2010, from 2.5% in 2008. The EU mandates a 3% of GDP cap on the budget deficit.
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 center 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%.
Tags: italy real estateFrom putting in your offer to picking up the keys … an overview of the entire process of buying property and real estate in Italy.
Buying real estate in Italy — the process
The first thing to remember? Forget all you know about buying a home in the UK, the US or wherever: buying property in Italy is different; terms you may recognise from the UK or American house-buying process may have completely different meanings here and it’s safer to start from scratch. As ever, we recommend that you engage your lawyer at the earliest stage for your own protection. In fact we recommend that you engage a lawyer or solicitor from your home country in addition to the Italian lawyer who handles the deal.
You can search this site by region or by price bracket. Wherever you’re looking in Italy, you’ll find property on KeyItaly. But the first thing to do is familiarise yourself with the country, the culture and the differences between different areas. Go to our region guides to start with. You will also want to familarise yourself with the buying process — this is real estate purchase but not as we know it. And you will want to learn what it’s like to live in Italy, whether this is going to be a holiday home, a second home or your permanent domicile.
Types of Italian real estate
If you’re after Italy property and real estate for sale, then get used to a whole new language. You’ll know what a villa is, and you can work out appartamento, but what about the bilocale, casetta or terratetto? We’ll give you a complete guide to types of Italian property and real estate.
We’ve given guide prices in the each of our Italian region pages, but remember this is a rule-of-thumb guide to the Italy property market, especially useful for comparing one region, city or province to another, but not writ in stone.
Real estate in Italy — foreign exchange, mortgages, the law, your new home
When you’re dealing with foreign currencies, exchange rates, unfamiliar legal and banking systems, and possibly the rebuilding of a derelict property (and thus with local tradesmen), you need to know where every penny is going … and how many euros you’re getting for your dollar or pound. So we show you how to get the finances in place.
We lead you step by step through the legal process, from putting in your offer to completion and registering of deeds. And we help you settle into your new home, with guides to making the move, employing tradespeople and much more.
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