Italy's housing market improving
Last Updated: March 05, 2015
Italian house prices are projected to drop by another 2% this year, before registering a minimal growth of 0.9% in 2016 and 2% in 2017, according to the research house Nomisma. “Unless the economy worsens further, a timid price recovery is expected at least in the cities in 2016,” Nomisma said.
Italy’s house price index fell by 3.84% during the year to Q3 2014, the lowest y-o-y decline since Q3 2012, according to Eurostat. When adjusted for inflation, the index only fell 3.57% (Nomisma has similar figures, with average property prices in the country’s 13 biggest cities falling 4% for new and 4.4% for existing homes).
Rome saw an annual house price fall of 4.1% in 2014. Milan and Venice registered declines of 3.2% and 4.8%, respectively. These three major cities are the most expensive Italian cities, with houses priced above €3,000 per square metre (sq. m.), according to Nomisma.
Bologna, Mestre and Padua recorded the highest annual house price falls in 2014, at between 5% and 5.3%
Padova and Venezia Mestre had the longest time to complete a sale, at about 9.5 months.
Sales in Italy's cities are rising. Residential property sales soared by about 23% in Florence and by 19% in Bologna y-o-y to Q3 2014. In Rome, residential property sales were also up by 11.8% over the same period. In Q3 2014, there was also an increase in activity in other major cities, such as in Genoa (10.4%), Palermo (8.9%), and Naples (7.3%), according to ANSA.
The number of property transactions country-wide rose by about 3.6% in the third quarter of 2014 from a year earlier, to almost 207,000 transactions, according to the country’s revenue agency Agenzia Entrate.
The increase in demand was partly due to the return of foreign homebuyers, especially from the United Kingdom and the United States.
The history of the crisis
From 2000 to H1 2008, Italian house prices rose 85%, based on figures from Nomisma (53% inflation-adjusted). However, house prices fell by 8.6% from H2 2008 to 2011 (-14.3% inflation-adjusted), and fell by another 10.3% from 2011 to 2013 house prices (-13% inflation-adjusted), according to ECB figures.
Deterring the housing market recovery is the recently introduced property tax TASI, which now affects main and secondary homes, which is tied to a garbage tax and an existing tax on secondary homes.
The Italian economy was still in the doldrums in 2014, with GDP falling by another 0.2%, after contracting by 1.9% in 2013 and 2.4% in 2012, according to the International Monetary Fund (IMF). The economic outlook for Italy is better in 2015, with growth expected to be around 0.9%.
Poor rental returns in Italy
In the historical centre of Rome, apartments now cost between €6,000 and €6,800 per square metre (sq. m.), more or less unchanged from last year. The property slump was caused by a number of factors, including the euro zone crisis and austerity measures like higher property taxes such as the Imposta Municipale Unica (IMU) - in English, the Local Property Tax.
Prices of apartments. Apartments in the wealthy suburbs of Rome cost on average between €4,400 to €4,900 per sq. m.. A 120 sq. m. apartment in the suburbs would cost around €4,450 per sq. m.
A 120 sq. m. apartment in Milan would cost on average €4,900 per sq. m. Milan apartment prices range from €4,500 per sq. m. to €5,200 per sq. m.
Rents of apartments. In the historical centre of Rome, monthly rents range from €16 to €20 per sq. m., and you can rent a 120 sq. m. apartment here for around €1,900 per month.
In the suburbs of Rome, rents range from €12 to €16 per sq. m. per month. So a 120 sq. m. apartment can be rented for around €1,450 per month.
In Milan, monthly rents range from €14 to €16 per sq. m., and you can rent a 120 sq. m. apartment here for around €1,750 per month.
Rental returns. Gross rental yields on apartments in Rome and Milan are poor. Gross rental yields on apartments in Rome’s historical centre range from 3.00% to 4.02%, with little difference in returns by size.
In the suburbs, rental yields range from 2.95% (200 sq. m.) to 4.37% (45 sq. m.), with large apartments yielding significantly poorer investment returns.
Apartments in Milan return rental yields of between 3.53% to 3.88%, with no clear pattern of rental returns according to size.
Conclusion: Property prices are beginning to look attractive. But gross rental yields are very poor, and Italy’s predatory taxation system doesn’t help.
Round trip transaction costs can be very high on residential property in Italy. See our Italy residential property transaction costs analysis and our Residential property transaction costs in Italy compared to other countries.
Rental income tax is high in Italy
Rental Income: Nonresidents are taxed on rental income earned in Italy. The rates range from 23% to 43%. Personal allowances for spouse and family are not available to nonresidents, but certain deductions may be granted.
Capital Gains: Capital gains are not taxed if the property was held for more than five years. Otherwise capital gains are considered as ordinary income and taxed at progressive rates.
Inheritance: Inheritance taxes are levied at 4% to 8%, depending on the relationship between the deceased and the beneficiary, with non-taxable threshold amounts.
Residents: Residents are taxed on their worldwide income. at progressive rates, from 23% to 43%.
Transaction costs are moderate to high in Italy
Total round-trip transaction costs in Italy range from 8.88% to 22.70%of the property value. Registration tax is 3% for main homes and 7% for second homes. Nonresident buyers pay a fixed registration tax of 7%. The real estate agent’s commission is between 3% and 8% plus 22% VAT; typically split between buyer and seller.
Italian law is strongly pro-tenant
Because of strongly pro-tenant landlord & tenant laws, the rental market is shrinking.
Rents: Rents can initially be freely negotiated, but increases are restricted. Landlords can only increase the rent after the initial 4-year contract.
Tenant Security: Tenants have the right to controlled rents, and effectively eight years or more of security of tenure. A landlord may only serve a disdetta - a registered letter of notice which must be sent at least six months before contract expiry - to coincide with the end of the standard 4 years. Failure to do so automatically renews the contract for another 4 years.
Italy’s economy to return to growth in 2015The Italian economy was still in recession in 2014, The Italian economy was still in the doldrums in 2014, with GDP falling by another 0.2%, after contracting by 1.9% in 2013, according to the International Monetary Fund (IMF). GDP growth is expected to bounce back to 0.9% in 2015, with rising private consumption and an increase in investments.
Italy’s economy went back into recession in 2012, with GDP falling 2.4%, preceded by meagre growth of 0.4% in 2011 due to the euro zone crisis. The country became one of the first euro zone victims of the global financial meltdown of 2008. The economy contracted by 1.2% in 2008 and by another 5.5% in 2009. The country went back to 1.7% growth in 2010, but this did not last.
Even before the global crisis, the Italian economy had already been growing sluggishly, with an average real GDP growth rate of 1.26% from 2001 to 2007.
Italy is the euro zone’s third largest economy with a total population of almost 61 million and a GDP per capita of US$35,512 in 2014. However, the country’s public debt is also remarkably large, estimated between 135% and 137% of GDP in 2014. Since 2007, public debt in Italy has steadily increased, rising from 103% of GDP to 127% of GDP in 2012 and to more than 130% of GDP in 2013. Italy currently has one of the highest debt to GDP ratios in the euro zone.
From January to September 2014, the country’s budget deficit widened to 3.7% of GDP, compared with 3.4% in the same period in the previous year, according to ISTAT. In 2013, the budget deficit was reduced to about 2.8% of GDP, down from 2.9% of GDP in 2012, 3.9% of GDP in 2011, 4.6% in 2010 and 5.4% in 2009.
In December 2014, the overall unemployment rate stood at 12.9%, down from 13.3% in November 2014 but up from 12.6% in the same period last year, according to ISTAT.
In February 2015, consumer prices dropped 0.2% from the same period last year, after an annual deflation of 0.6% in the previous month and an inflation rate of 0.5% a year ago, according to ISTAT.