Why have house prices in Italy continued to fall?

One of the features of these times is that economic policy is pretty much invariably house price friendly. Not only have central banks around the world slashed official interest-rates thereby reducing variable mortgage rates but many followed this up with Quantitative Easing bond buying which pushed fixed-rate mortgages (even) lower as well. If that was not enough some of the liquidity created by the QE era was invested in capital cities around the globe by investors looking to spread their risks. In addition we saw various credit easing programmes which were designed to refloat even zombie banks and get them back lending again. In my country this type of credit easing was called the Funding for Lending Scheme which did so by claiming to boost business lending but in reality boosted the mortgage market. Looked at like that we see policies which could not have been much more house price friendly.

If we switch to the Euro area we see that this went as far as the ECB declaring a negative deposit rate ( -0.4%) which it still has in spite of these better economic times and a balance sheet totaling 4.5 trillion Euros. This has led to house price recoveries and in particular in two of the countries which had symbolised a troubled housing market which were of course Ireland and Spain. But intriguingly one country has missed out as we were reminded of only yesterday.

The Italian Difference

Yesterday morning the official statistics body Istat told us this.

According to preliminary estimates, in the third quarter of 2017: the House Price Index (see Italian IPAB) decreased by 0.5% compared with the previous quarter and by
0.8% in comparison to the same quarter of the previous year (it was -0.2% in the second quarter of 2017);

The breakdown shows a small nudge higher for new properties that in aggregate is weaker than the fall in price for exisiting properties.

prices of new dwellings increased by 0.3% compared to the previous quarter and by 0.6% with respect to
the third quarter of 2016 (up from +0.3% observed in the second quarter); prices of existing dwellings
decreased by 0.7% compared to the previous quarter and by 1.3% with respect to the same quarter of the
previous year.

Property owners in Italy may be a little jealous of those in Amsterdam who have just seen a 13.5% rise in house prices in the past year.

A ( space) oddity

The situation gets more curious if we note that as discussed earlier the mortgage market has got more favourable. In terms of credit then there should be more around as at the aggregate level the ECB has expanded its balance sheet and we know that Italian banks took part in this at times on a large scale. Whilst the overall process has been an Italian style shambles there have (finally) been some bank bailouts or rather hybrid bailin/outs.

If we move from credit supply to price we see that mortgage rates have been falling in Italy. The website Statista tells us that the 3.68% of the opening of 2013 was replaced by 2.1% at the half-way point of 2017. The fall was not in a straight line but is a clear fall. Another way of putting this is to use the composite mortgage rate of the Bnak of Italy. When ECB President gave his “Whatever it takes ( to save the Euro speech)” in July 2012 it might also have been save Italian house prices as the mortgage rate fell from 3.95% then to 1.98% as of last November so in essence halved.

So if we apply the play book house prices should been rallying in Italy and maybe strongly.

House Price Slump

Reality is however very different as the data in fact shows annual falls. For example 4.4% in 2014 and 2.6% in 2015 and 0.8% in 2016. Indeed if we look for some perspective in the credit crunch era we see the Financial Times reporting this.

In real terms, Italy’s real house prices have been falling consistently since 2007 and are now 23 per cent lower — a drop that has brought the construction and property sectors to their knees.

If we look back to the credit crunch impact and then the Euro area crisis which then gave Italy a double-whammy hit then we see that lower house prices are covered by Radiohead.

No alarms and no surprises

Although existing property owners may be singing along to the next part of the lyric.

let me out of here

What is more surprising is the fact that the economic improvement has had such a different impact on house prices in Italy compared to its Euro area peers.

Italy was the only country in the EU where house prices contracted in the second quarter of last year, according to the latest figures from Eurostat, the EU statistics agency. In contrast, almost two-thirds of EU countries are reporting house price growth of more than 5 per cent. ( FT )

If we look at the house price index we see that as of the third quarter of last year it was at 98.6 compared to the 100 of 2015. So just as Mario Draghi and the ECB were “pumping up” monetary policy house prices in Italy were doing not much and if anything drifting lower. Looking further back we see that the index was 116.3 in 2010 so it has not been a good period of time for property owners in Italy and that does matter because of this.

and in a country where more than 72 per cent of households own their own home

I have to confess I was not previously aware of what a property owning nation Italy is.

The banks

We have looked many times at the troubled banking sector in Italy and we have seen from the numbers above that the property market and the banking sector have been clutching each other tightly in the credit crunch era. Maybe this is at least part of the reason why the Italian establishment has dithered so much over the banking bailouts required as it waited for a bottom which so far has not arrived. This has left the Italian banking sector with 173.1 billion Euros of bad loans sitting on their balance sheets.

Property now accounts for more corporate bad loans than any other sector: 42 per cent compared with 29 per cent in 2011………And for property-related lending the proportion of loans turning bad has been twice as high as in the manufacturing sector, weighing on banks’ €173bn of bad debts. ( FT)

So something of a death spiral as one zombie sector feeds off another as this reply to me indicates.

The trend is getting better for Italian house market but it is a vicious circle: banks’ sales of repossessed property is also contributing to the prolonged house price contraction. The number of real estate units sold via auction increased 25 % in the last 2 years ( @Raff_Perf )

As The Cranberries would say “Zombie, zombie,zombie”

Disposing of bad property loans has also been slower than for other sectors……… In contrast, banks continue to harbour hopes of greater recovery of secured loans to construction and real estate companies. As a result, this lending has remained in limbo for longer.

Another forward guidance fail?


One way of looking at Italy right now is of a property owning democracy which has had a sustained fall in house prices. This of course adds to the fact that on an individual basis economic output or GDP has fallen in the Euro area as output stagnated but the population rose meaning the net fall must now be around 5%. It is hard not to wonder if the “Whatever it takes” speech of Mario Draghi was not at least partly driven by rising mortgage rates in Italy ( pre his speech they went over 4%) and falling house prices in his home country. Along the way it is not only the banking sector which is affected.

Construction has almost halved from its pre-crisis level. ( FT)

That puts the UK’s construction problem I looked ta yesterday into perspective doesn’t it?

Looking ahead we see a better economic situation for Italy as it has returned to economic growth. What this has done if we look at annual house price numbers is slowed the decline but not yet caused any rises. In some ways this is welcome as first time buyers will no doubt be grateful that they have not seen the rises for example seen in much of my home country but if with all the monetary policy effort the results are what they are what happens when the next recession turns up?

Still if you want the bill pill Matrix style there is this from AURA who call themselves real estate experts.

“I would say it’s a mathematical fact: house prices cannot drop more than 30%. I believe that this drop of values is over and it’s now time to buy”. Stefano Rossini, Ceo for MutuiSuperket.it,

Perhaps he has never been to Ireland or more curiously Spain.

Me on Core Finance






21 thoughts on “Why have house prices in Italy continued to fall?

  1. Interesting article, Shuan, as usual.
    Have you any individual figures on Rome and other major cities in Italy, as I was wondering if they buck the general trend and have attracted overseas investors.
    Also how easy is it for a non Italian/European to buy in Italy?

  2. It says a lot that many Italians have Swiss Franc savings account.
    At some point the people of Europe will have to eat the dogturd sandwich the ECB has made for them.

    • Swiss Franc accounts were commonplace, at least in Northern Italy, in the 1970s, so I don’t think you can read too much into this wrt their view of the Euro or ECB.

  3. Of course what matters is real interest rates, not nominal ones. And given the poor state of the Italian economy it is likely that the natural rate of interest is pretty negative, which means that positive nominal rates mean very high real rates, so that explains why house price continue to fall. Moving away from a monetary explanation, Italy is experiencing poor demographics and with their economy doing so poorly few people are moving there from other countries. So land prices are fall due to less demand. From my own experience the legal framework in Italy for property is also problematic, it is very hard to establish clear title, which again mitigates against outsider’s buying property.

    • Italy is depopulating as people leave and the younger generation just don’t have as many children so demand will drop that way. They have lost all their manufacturing of white goods to South Korea and China ( thanks EU for letting yet another industry get bullied out of existance ).
      It is also an earth quake zone so older houses don’t have the newer building techniques/materials designed to handle this better and are less valued.

      • I think it is more the ECB at fault. previously Italy had a built in safety relief valve in their high inflation rate and consequently falling exchange rate for the Lira. This meant constant re-adjustment of real salaries for their workers, which kept their industry competitive. German style inflation rates and Italian style labour market rigidity just don’t work together. Personally I also believe this is part of the demographic problem, low inflation causes falling population if you like, by the mechanism that people don’t see their nominal incomes growing, so don’t want to take on more responsibilities like children.

  4. Great blog as usual, Shaun. Your blog inspired me to look up the Istat note on their home price index:
    I notice that in its hedonic regressions Istat uses the log of the house price per square metre as the dependent variable, while the ONS in calculating the UK HPI uses the log of the house price as the dependent variable and the floor area as an independent variable. Eurostat considers both practices acceptable in calculating an HPI.
    In a 2012 paper when the Eurostat HPIs were still under development:
    it was noted that: “[a]lthough the price level and the log of the price level per square meter are used, taking logs of the full price is the most common form of the dependent variable.” So the ONS practice is a lot more used than the Istat practice. Using the log of the house price per square metre as the dependent variable makes strong assumptions about the relationship between house prices and floor area that it would seem better to test for using the data. On the other hand, because of its choice of dependent variable, Istat requires a floor area for any house in sample and presumably discards any observations for which the floor area is unavailable. ONS will still include such observations but “a property with missing floor area will have a lower weight”. How useful is an observation to a hedonic price regression if one doesn’t even know the floor area of the home?

    • Hi Andrew and thank you

      I was on a not dissimilar road as the OOH ( NA) method has been on my mind and I have been making enquiries about the UK version.So there I was looking at this and facing a reality that this should have been debated more.

      “More specifically, the OOH index follows the net acquisitions approach; as a consequence only dwellings that are acquired by households for own use and that are new to the household sector are included. In fact the aim of the HICP is to provide a measure of the inflation perceived as a monetary phenomenon restricted to market transactions made by the household sector with other institutional sectors. Unlike HPI, the OOH will not cover all dwellings transactions because transactions carried out within the household sector are out of scope. Finally the price of the land is excluded. ”

      Currently for Italy it is not a big deal as it is not seeing asset price inflation but should it do so at a future date it will find that OOH (NA) was at least to some extent neutered by design.

      • I think the Eurostat definition is too restrictive too. Omitting purchases of existing dwellings within the household sector is justifiable. Existing home prices wouldn’t be ignored: they would still be picked up in land transfer taxes, real estate commissions, and any other transaction costs linked to them. If there were substantial ongoing net purchases of existing dwellings by the household sector from the non-household sector these would be picked up too (although they are ignored, if they exist, in the current ONS quarterly OOHPI. However, there doesn’t seem to be any justification for restricting the net acquisitions expenditure weight to dwellings and ignoring the serviced lots (it’s not raw land!) that they stand on. All residential construction and renovations of existing dwellings and residential transaction costs are treated as investment, not consumption expenditure in the System of National Accounts, so the OOHPI as conceived by Eurostat doesn’t remotely qualify as a price index for consumption. To take serviced lots, what Eurostat calls land, out of scope because it is not consumed, makes no sense at all, when you are working with an index that is already hopelessly compromised as an index of prices of consumption expenditures in a national accounting sense. If you want an inflation index that provides some security against a housing price bubble, then why take the serviced lot cost out of the expenditure weight?

  5. House prices cannot go on rising when real terms income is going the opposite way.
    The amount of debt that can be accrued by individuals companies,football clubs and Governments has a limit even when currency is being created exponentially by Central Banks.
    Stocks,bonds and housing are all going to crash in value as they have all been inflated way beyond their true value by the actions of banks and Central Banks.
    The debt bomb is ticking no one knows when it will go off could be tomorrow or in 5 years time but when it does trillions in paper valuations will be lost

    • Hi PrivateFraser

      Italy is seeing the debt issue via a different lens to us. Falling house prices give something of a chill to interest-only mortgages and also to bank balance sheets. Thus it is also part of the non performing loan problem in Italy and the bank troubles.

      It could easily end up a can kicking episode which makes everything worse.

    • Pte Fraser.
      House prices rise or fall in line with what financial institutions will lend, and that is the only perameter.
      Those financial institutions can just change the terms/length of loan.

  6. I bet there is a big disparity in Italy between central Milan and some hut in Sicily about to be overrun by hordes of African migrants.

    More generally, Fraser is right – in the end, debt has to be sustainable and many people get their debts called in long before they are actually insolvent. In the UK, if you are debt-free, you do not have to be earning that much to “afford” a £100K mortgage at 3%, but the banks would take a different view if you already had £300k of debt. The more asset prices rise, the more they suck strength from the current consumption, which is what keeps many people in work.

    It was the same in 1989-90, when prics began to fall, even thought the economy was still doing quite well. So, it is a question of reading the signals – UK consumption is tanking now that we have maxed out unsecured debt and the falls among the last canaries – car finance – are quite steep.

    We shouldn’t perhaps worry too much about Italy – it will be as nothing compared with here.

    • Hi David

      I recall seeing pictures of groups of migrants camping on the streets of Milan so the issue is widespread albeit that it must be more of an issue in the south. As I have replied to others it is a shame there are not official city or regional indices.

      Thoughts like this would cause sleepless nights at the Bank of England.

      ” The more asset prices rise, the more they suck strength from the current consumption, which is what keeps many people in work.”

  7. Shaun, very interesting that. I’ve taken to holidaying in Italy the last couple of years since it is , affordable (off the beaten track), stylish and the food quality is good. I sent some updates from Siena and the troubled and original European bank MPS. I even thought of buying in Livorno, but falling prices aren’t exactly encouraging… I noted in the FT today that banks are offloading Italian properties at auction so that might be a better way to navigate the afore mentioned title issue.

    This year I am making my own “Riva Aquarama” to cruise the hot places on the Med and the Italian lakes, maybe I will happen on a waterside villa I like?


    • Hi Paul and I am sure I was not the only one who enjoyed your letters from Italy.

      Back in the day I went to an auction or 2 as when I first bought a place in the early 90s house prices were falling in the UK. I remember looking at a flat only half a mile or so from where I am now but the problem was you had to buy pretty much “as seen” and my expertise was limited ( mostly my dad advising as he was a surveyor) so I did not buy. I do not know how it works in Italy.

      If you find one cheap it may well be la dolce vita for you the only other catch I can think of would be it would be nice for such a purpose to have a stronger £.

  8. on a side issue anyone think its funny how TM bleated about a “greener” Britain

    for the past two days we’ve been stuffed as far as wind and solar and have been burning the gas and coal like crazy

    I wonder if Italy has the same problems – ie we have about 13/14GW of installed wind power and currently as I write we get just over 0.5 GW generated …….

    just wait until St Corbyn the Deluded and the Nu-Labor close all the coal and nukes…… gonna be a cold night I think 😉

    could be worse – we could have St Merkel of the Migrants , eheheheh

    must provision some bottled gas to make some popcorn – Green aint gonna cook it !


    • Hi Forbin

      Your comment made me check it and yes only 0.83 Gw of wind power as I type this so it is a good job that the weather is not colder. The main scope for more power would be from old fashioned coal. As we have large stocks of it I have never quite understood why we have not put more effort into cleaner coal power production.

      I am pleased to see that even in an emergency you would not be short of popcorn….

      • Shaun, our coal stations have been clean for years, no Nox, Sox or particulates. The only thing they emit is plant food , but that magic molecule has been designated as a demonic element by the green blob, so we are due to close the last coal plant in 7 years time. Lights out!

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