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The Real Estate market :: Italy

In spite of the sluggish trend of the economy, the property market has been through a period of growth that has now lasted for over 8 years. Although the market has slowed down in the last 2 years, the price of real estate in Italy is still growing at an average rate of property 5% (2006 data, Scenari Immobiliari).
The number of deals referred to residential properties reached 883,000 in 2005, increasing steadily throughout this growth cycle (with the exception of 2001), that is to say 50% more than the number in 1991, when the market last peaked.
Over the last 20 years the Italian real-estate market has been through several ups and downs:
• In a first stage, between 1985 and 1992, the average annual growth rate in purchases was 4.4 %, with sharp rises in prices.
• Then, from 1992 to 1996, the market remained more or less stationary in terms of the number of sales, with a sharp drop in prices.
• From 1996 up to the present time, with a single break in 2001, the size of the market has been growing at an average yearly rate of 7%.

As far as concerns prices, Nomisma has estimated that dwelling prices in Italy have increased on the average by 81 % from 1997 up to the end of 2005. This trend is very different from those in South Africa (+279%), in Ireland (+212%) and in Great Britain (+167%). In 2005, the average increase was 7%, slightly higher in medium-sized towns and smaller places than in large cities. There are, however, some signs of a slowdown, such as the fact that the average selling time has increased to 4 months in medium-sized towns and to 2.7 months in large cities.
As far as concerns the causes of this property boom, in our opinion they stem from a plurality of factors, both referred to economic trends and of a structural nature.
The population increase and that of the number of families, the introduction of the Euro with the consequent vertical drop in interest rates, the abolition of inheritance tax on real estate and the arrival of estate investment trust funds on the financial market are just some of the causes that made investing in real estate more attractive in recent years in relation to alternatives such as investing in equity or bonds. Over 60% of the total wealth of Italian families consists of real estate, to the detriment of investments in treasury bills and in the Stock Exchange.
This structural change in the preferences of Italian investors is noticeable not so much in price trends as in the number of deals. The stock exchange crash was not the only factor that boosted the real-estate market, the growth in size of which started right in the middle of a bubble, so that it accompanied the boom in share prices rather than replacing it.
Apart from the period between 2000 and 2003, property market and the stock exchange generally exhibit converging trends, although this tendency is not very significant in statistical terms. According to our figures (available for viewing on request), at the present time a monthly rise of 10 percentage points of the Mib30 index entails a rise of the ISI property price index of 0.75%.
The Italian real-estate market is very sensitive to both credit and debit interest rates.
The differential between the gross yield of dwellings and that of government bonds, which was almost 2 percentage points in mid 2004, has narrowed down a great deal. In Milan, rented properties now yield 4.2 % gross on the average, in Rome 4 %, which is a sharp drop from the peak in 2000 and 2001. There is no doubt that the loss in purchasing power on the part of Italian families will continue to cause pressure on residential rents. The immediate yield of dwellings is in any case still competitive when compared with that of government bonds (average return of 3.69% in March 2006, source Banca d’Italia) and, even if incomes from rental were to be further eroded, investments in real estate continue for the moment to ensure a return in excess of 10% gross, attracting a large number of institutional investors. In 2006 the number of estate investment trust funds reached a record of 42 (29 in 2004), managing assets for an overall value of 11 thousand million Euros (source: Nomisma), and this growth is expected to continue. In our opinion, all this will prevent the market from dropping, although it will not repeat the recent spectacular upward performance.

Moreover, the drop in interest rates has made the use of mortgage loans more attractive, and indeed they have more than doubled between 2000 and 2006. Even if the average interest rates were to increase (4.36 % in March 2006, source Banca d’Italia), only rates in excess of 6%-7% would have a great negative effect on the real-estate market. The two increases applied by the European Central Bank since the end of 2005 have so far had a relatively insignificant effect on the average interest rate of loans. Italian families have reached a level of indebtedness of 30% (20% in 2000), which is far lower than the European average (56%), not to mention the USA average (90%).
In statistical terms, an increase of 1 % in the average interest rate on loans over the last 7 and a half years has led to a drop of 8.37 % in the real-estate market (source: data processed by us).

Updated: June 2006

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