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Why real estate is stuck

05 November, Milano Finanza

The property market in Milan is booming, while the rest of the country is stuck. Or to put it even better, property prices are plummeting year after year. Yet, there are all the elements for a recovery: transactions have been rising since 2015, prices are convenient and mortgages affordable, while the rental market offers excellent opportunities to landlords and houses rent out easily. In a different situation, we would have seen a double-digit growth, also because the lowest point reached of the market (2012-2013) is way past.  In Europe, prices of residential properties are rising, to the point that in some cases, operators talk about a speculative bubble or a slowdown.

On the contrary, in Italy, analysts and operators in the sector have been talking about the upcoming turning point of the market since 2014-2015 for then ending up postponing it to the next year (the latest forecast says that it will happen in 2019). Giuseppe Crupi, AbitareCo Ceo, explains: “Prices generally follow the transaction trend with some years of delay: they fall, and they go up again. But transactions started growing four years ago, and nothing has happened yet. Or nearly nothing”. There are some exceptions, and they partly explain this strange market trend. Besides Milan (and not the whole city), “prices in the main cities and the tourist destinations have resumed growing”, says Scenari Immobiliari President Mario Breglia. “There are about forty locations in total throughout Italy, and they all have specific characteristics: they are beautiful new houses, newly-constructed or remodelled, attracting workers, students and tourists”.

The demand is not lacking liquidity, on the contrary. In its 2018 Residential Real Estate Report, the Revenue Agency shows that the affordability index, namely the purchasing power related to the property prices, is at its highest since 2012. For this reason, the demand has become more selective. Italians are not looking only for centrally-located and luxury properties, but they generally want modern houses (trendy materials and structures, energy efficient, common spaces, domotics), conveniently-located and well-connected, natural light, a garden or a park nearby, even better if they feature a terrace, although only a house every ten has one. Bottom line, there’s plenty of offer and money is not a problem. It means that nobody wants to settle for a house in bad conditions, on the ground floor or without a lift, or facing on the inner courtyard. “This is true for Milan but not only. Prices have been growing in recent years also in the city centre of Turin, Bologna and Naples”, adds Crupi. In these cities, it’s easier to find new properties of good quality. Breglia summarises: “Basically, it’s happening to real estate the same that happened to the automotive market. New cars sell well even though they cost a little bit more, while used cars sell only if they are heavily discounted, but this latter weight more on the national average trend”. It’s not by chance that, the house price index (Ipab) distinguishes between new and existing construction. Only new houses are growing. “In the first semester, property prices decreased by 0.4%, New properties, representing little more than one-fifth of the index, increased by 1.3%, whereas the existing ones decreased by 0.9%”, reads the latest Istat report. “Compared to the average in 2010, property prices in the second quarter of 2018 dropped by 15.8% due to existing houses only, which lost 22.1% of their value, while prices of new hoses grew by 0.8%”.

But poor quality is not enough to explain this standstill. During the previous boom trend, even basements were selling out. Today, what deters the market is the small dimensions of the demand. In fact, the Italian population is not growing, while immigrants buy now one-third of the houses on the market compared to 10 years ago (50 thousand against 150 thousand). The young population is modest, and young people don’t consider buying a house as an important milestone. Many think that “It’s better renting a nice and comfortable apartment rather than buying an ugly house which is the only one can afford”. It’s not by chance that many 4+4 lease contracts have reached 700 thousand units a year, beating transactions that are supposed to reach 600 thousand by the end of the year. The preference to rent has an impact on the best properties while it condemns others that need thorough renovation works. Breglia adds: “In such a context, it’s clear that cities are the best places since there is a constant supply of new tenants and buyers. The other cities, like provincial cities, have to rely on the local market, which is small and with a low turnover. In the absence of inflation, how can the present situation lead prices upwards? However, an efficient management of resources, new projects and a widespread requalification activity can make the difference, especially concerning tourism. Look at Lecce, Matera and Siracusa, where investing in requalification revitalised the market”.

This was possible thanks to another component: the boom of short-and medium-term rentals for less than one year. In the last three years, the houses on the market have gone from 330 thousand to 1 million. They’re generally very well-kept, well-located and well-furnished; otherwise, they wouldn’t rent out. Landlords like the formula, not much for the higher returns, rather because there is no long-term commitment and no risk of insolvency of the tenants, as who rents short-term are professionals, students and tourists. As a result, the phenomenon reduced the number of quality properties on offer, fostering the vicious circle of poor-quality properties, lengthy negotiations, high discounts and unchanged prices.

When will prices recover? Pessimists fear that a new slowdown at European level might come sooner than an actual recovery of prices in the Italian market, while a more positive outlook believes that the price growth will be more widespread in 2019. What about Italy’s low growth rate? The good news is that it is not a determining factor: in France, property prices grew by 6% against a growth of 1.5% of GDP; in Germany, prices rose by 5% against the 1% of GDP.

Source: Milano Finanza

Translator: Cristina Ambrosi