Italy: Too Big to Fail, Too Big to Bail

The current debt percentage isn’t much
higher than it was in the beggining
of 2000s, but combined with weak
economy it is a serious problem

Italy was called the Sick Man of Europe (taking the title from Portugal) because its economy was growing very slowly. It was just the beginning, though, of the catastrophic economic situation that the country faces today. However, the housing market isn’t among the main reasons of its weak economy like in Portugal. Italian real estate stock is still weak, but it doesn’t suffer as much as the other sectors of Italian economy touched by the tough measures.

Economy: Very Bad Numbers

Italy’s economy has been one of the weakest in the Eurozone since the financial crisis boomed. In 2008, its GDP growth was negative and the third lowest among OECD countries. In 2010, the GDP finally grew, but remained among the lowest (seventh in OECD). Italy’s debt is 120 per cent of its GDP, the fifth highest in the world, and its government deficit is 5.1 per cent of its GDP. All these numbers have caused investors to worry and frozen the Italian market, resulting in bond yields going up and stock markets going down.

Although the European Central Bank has helped Italians by purchasing large amounts of their bonds, the economy is still bleeding. Italy’s bankruptcy is the EU’s nightmare: its economy is four times larger than Greece and Ireland’s economies combined. While the EU can help Portugal, Greece, and Ireland by bailout loan, it can’t find enough money to help Italy’s huge economy. S&P’s has downgraded Italy recently, causing another day of turmoil in European markets.

“The point here is that all of the news out of Europe is horrid these days and this is but another in what shall be a long line of ratings cuts for the PIIGS, one at a time,” said Dennis Gartman, editor of The Gartman Daily Letter.

Italians base their hopes on the fact that the Italian crisis differs from Greece because much of the debt is owned by Italians, which allows for more flexibility. The latest government measures should shave more than 54 billion Euros off Italy’s deficit over three years through spending cuts, tax hikes (including raising the sales tax from 20 per cent to 21 per cent), and accelerating the reform of the country’s costly pension system.

Italian Property: Who Buys It?

Constructions costs have been
increasing much

Foreigners buy homes in Italy more than in other PIIGS countries, and not only because the Italian market is so huge. Italian housing is also very attractive because it is a well-developed country with beautiful landscapes, a rich history, and interesting cultural specifics. Italy has the eighth highest quality of life and is the 23rd most developed country, so international investments in property are another driver of the housing market. However, the current situation has brought uncertainty into Italian markets, and investors are afraid of investing in such a risky country.

The EU allows retired people to retain many state benefits regardless of where they live within the Union. This has made retiring to a warmer climate an opportunity for many Europeans, so many buyers of Italian property are retired people from other EU nations.

Housing Stock: Weaknesses

Housing stock faced serious problems in Italy even before the debt crisis. These included poor quality, about one quarter of housing needing significant modernization, a lack of investment emphasis on the maintenance and renovation of existing property, and rental restrictions leading to speculation.

Private renting isn’t popular in Italy. Due to rent controls, the rental market yielded poor returns. The controls were cancelled in 1978, but thirty years later, only 20 per cent of the Italian housing market was rental. Today, rent costs can only be increased annually by 75 per cent of the cost of living index if a landlord issues a standard four-year contract. These restrictions cause most landlords to prefer to ‘ front-load’ long rental contracts. Rents are high, and citizens prefer buying to renting.

Interestingly, the Italian mortgage market is smaller than those in other European countries: at below 20 per cent of the GDP in 2008, significantly lower than the EU’s average of 50% of GDP. The main reason for this figure is the length and cost of the loan recovery process in Italy.

Italian Housing Today: Beginning of Slow Recovery?

After growing more than 70 per cent from 1998 to 2008, Italy didn’t experience sharp house price falls with the global financial crisis. Italian house prices fell by 1.5 per cent in 2010 and 1.2 per cent a year before. The latest report by Nomisma, a well-known Italian economic research institute, shows that the residential market is slowly recovering and leaving the cycle of decreasing house prices behind. The volume of sales grew by 3.4 per cent in 2010, and the growth is also predicted in the second half of 2011. This suggests the beginning of recovery, but while the economy is in trouble, the housing market is in danger as well.

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