The Italian housing market : revealing households’ caution
Although the housing market by nature has a degree of inertia relative to the economic cycle, it is patently obvious that in Italy, this market lacks the dynamism seen in neighbouring countries, in a phase of strengthening growth throughout the eurozone. This much is clear from the latest available data. The average price per square metre in the Italian housing market fell 0.8% year on year in the third quarter of 2017, compared with a 4.1% rise over the same period in the eurozone as a whole. In Italy, house prices have been falling steadily since 2011, though the pace of this decline has slowed very gradually since 2014, with prices almost levelling out at the end of the first half of 2017. It was thus possible to hope, last year, that a six-year correction was coming to an end. It was not to be, and this fall in prices – which has still not completely stopped – coincided with the sixth consecutive quarter of slowing transactions, up 1.5% year on year. Residential property sales fell from a record high of 880,000 transactions in 2006 to 400,000 a year over the period 2013-2014. While sales picked up after this trough, last September they had been stagnating for six months at around 530,000 total sales over 12 months – still 40% less than in 2006. Prices, which had peaked two years later, were still 18% lower than their peak levels (23% lower in real terms).
Price support factors in 2018, but risks too
Stocks of unsold homes at the end of the recession likely allowed sales to pick up without putting pressure on prices. The current configuration of slowing sales and a residual decline in prices may mean that demand has weakened again and/or that supply is inadequate. If the former, the strengthening growth built into our scenario should boost demand and help prices continue to catch up, especially as the supply is only being replenished very slowly: building permits, housing starts and new builds arriving on the market show no sign of recovering; since 2013-2014, they have been at their lowest levels for at least 20 years. In the latter eventuality, wherein supply does not meet the requirements of customers more sensitive to environmental, energy and even seismic standards, it will be a number of years before a more suitable supply emerges. However, the outlook for the construction sector is also linked to its difficulties accessing credit since the crisis, which tend to leave it beyond the reach of banks’ efforts to increase funding for small and medium-sized businesses: in November, 28% of the stock of sofferenze (loans in default) on Italian banks’ balance sheets belonged to the construction sector. This equates to a 32.4% ratio of sofferenze in the construction sector, compared with an average of 16.4% for Italy’s productive sector as a whole.
Subdued housing trends are robbing credit of a driver
The housing market’s lack of conviction will continue to drag down the general trend in credit. While businesses are still Italian banks’ main customers in terms of outstanding loans, since the recession they have paid off more debt than asked for new borrowing, for reasons mainly to do with the still high level of credit risk on bank balance sheets and the current tightening of regulation and supervision – subjects that are very much in the news. Against this backdrop, banks can reckon that households are not in a position to generate the same flow of income they used to receive from businesses. Yet Italian households offer clear potential. They have limited debt, relative both to non-financial firms and by European comparison. Their purchasing power has recovered since 2015 thanks to the upturn in the labour market, which is supporting income and fuelling confidence. Consumer credit has picked up but, in spite of the interesting margins it can generate, equates to only one quarter of the home loan market, and does not allow to build the same kind of long-term relationship mortgages do with new customers. After recovering strongly in 2016, new mortgage lending has lost momentum over the past six months. As mortgage renegotiation requests have naturally dried up with the low level of interest rates, the volume of new home loans designed for a true property purchase has not risen fast enough to make up for the decline of the total new housing loan production. In an ageing population, it is true that 80% of the Italian market is made up of homeowners whose property assets have depreciated by 7% since 2011. Meanwhile, potential first-time homeowners – particularly young people – are more likely to be affected by a high unemployment rate. Banks have completed their home loan offers in a variety of ways besides low interest rates, proposing longer maturities, lower loan-to-value ratios and payment holidays. At this stage, this policy has yet to result in any real rebound in demand for housing loans.
Households are saving less: an issue for the asset management industry
For banks, households’ lack of appetite to invest in property and the corresponding decrease in borrowing are also affecting savings-related business, given their restrained ability than before the recession to put money aside. Households’ financial investment flows have diminished considerably relative to the pre-crisis period, falling from an average of €120 billion a year from 2000 to 2006 to €70 billion just before the financial crisis, and then to €30 billion a year since 2010. The household savings rate, which stood at 9.9% in September, is still more than five percentage points short of its 2008 level, as is the financial savings rate, which comes in at 1.3%. Since 2014, the slight recovery in financial savings has largely been in its most liquid form, inflating bank sight deposits – a trend also fuelled by low interest rates and a loss of interest in bond products. In spite of their risk aversion, households are yet more aware than they used to be of the retirement financing issue. They have proved receptive to financial innovations focused on the equity market that have become available in the past year (piani individuali di risparmio – PIR). However, the overall picture is still one of persistent cautious saving and investment behaviours. The traces of three years of deep recession have not yet been fully wiped away, and households still need to be convinced that the recovery is real.