Higher interest rates and skyrocketing inflation, for the real estate market down 15% in 2023

Real estate is affected by the new scenario of higher ECB interest rates and skyrocketing inflation. There are many unknowns about the sector. Nomisma, a reference point in the real estate sector, outlined the current picture and presented forecasts for the future. The estimate is for a sharp contraction in sales with prices which, however, should withstand the new shock wave. At the same time, the rental market is gaining ground, into which the many families who will remain outside the home ownership market will flock.

«After the striking post-pandemic exploit, the Italian real estate market now has to deal with a once again adverse scenario. The continuation of the unexpected war events, on the one hand, and the severity of the monetary policy measures decided by the ECB, on the other, combine to outline a framework that is anything but favorable for the ambitions to safeguard the levels reached up to now”.

This is what we read in the Observatory on the Real Estate Market – March 2023 by Nomisma presented today, which also analyzes the trend of the real estate sector in 13 intermediate markets (Ancona, Bergamo, Brescia, Livorno, Messina, Modena, Novara, Parma, Perugia , Salerno Taranto, Trieste and Verona).

In this scenario, recourse to credit by Italian households becomes essential, even if this growing need inevitably collides with a more prudent and selective orientation of disbursement policies by the banks, with the aim of keeping the riskiness of the compartment.

According to Nomisma, “what makes access to credit more difficult is not only the increased burden of financing – with interest rates going on average from 1.93% in May 2022 to 3.79% in February 2023 – but the changed perception on the future solvency of many of the potential borrowers’.

The changed attitude on the part of the banks inevitably has repercussions on housing demand, whose dependence on mortgages has been a factor that has already been recognized for some years now for a majority share of the population. The result is therefore – after the two-year period 2021-22 – a significant drop in real estate purchase intentions and loan requests. A drop which, according to Nomisma, does not depend only on household confidence indicators, albeit down compared to the peaks reached in September 2021, but also derives from the sudden tightening of customer selection criteria.

The question

More prudent credit policies have a negative impact on the flow of demand to the market and determine a drop in transactional activity estimated at around 14.6% on an annual basis, with an intensity of the contraction that should be more evident in the first part of the year, to then decrease starting from the summer with the progressive easing of the monetary tightening.

Prices

The most significant downsizing risks should be limited to the current year and not lead to a decline in nominal values. In this regard, Nomisma underlines how «the rigidity of house prices in the phases of cyclical slowdown represents a characteristic of the Italian real estate market, destined to find confirmation also in this economic phase in which the erosion in real terms will be anything but negligible, light of an unusually high inflation that is struggling to recede».

The evidence emerging from the monitoring carried out by Nomisma on intermediate cities confirms the continuation of a positive intonation in prices (+3.1% on an annual basis), even if it is in correspondence with the major markets that the appearance of any signs of recession is expected . In the cluster of markets analyzed by the report, a certain heterogeneity of performance can be found, mainly due to the time lags that have marked the inversion phases of the real estate cycles.

Sales times

Nomisma also highlights how in the last year the times to finalize the sale of a home have actually shortened slightly (5.4 months on average), not deviating from the levels reached in the final balance in 2021. Among the markets monitored is Trieste in mark the shortest times to conclude a sale negotiation (3 months for a used house). Considering the average discount on the asking price, this stood at 10.6% in the housing sector, with Trieste, Verona and Parma representing the markets with the greatest liquidity.

The rents

The situation on the rental side is more dynamic: stable long-term demand is joined by demand temporarily unable to access the property. The result is, therefore, “an upward pressure on rents of a greater entity than that of the dynamics of prices”. Gross rental yields – on average for the 13 markets monitored – have not undergone significant changes and stand on average at 5.5% in the residential sector. Considering the average times to rent a house, these amount to 1.5 months, while gross rental yields are in the order of 5.5%.

According to the Nomisma analysis, on the other hand, the situation on the corporate side appears more complex. Just when the recovery of the sector seemed to proceed at a brisk pace, with volumes returning to levels close to the historic highs, the progressive weakening of the economic growth prospects made the unresolved doubts on the part of foreign investors re-emerge regarding the country’s prospects and the sustainability of the public debt.

For Nomisma «the increased wait-and-see attitude, associated with the simultaneous rise in interest rates, has propitiated a rise in sector yields from the low levels at which they had settled, favoring that repricing process which the new scenario makes in fact unavoidable.

The extent of the correction will depend on the severity of the current slowdown and on the orientation that the ECB will give to monetary policies in the coming months».