How the real estate market in Italy will change after the coronavirus pandemic

The most dangerous enemy for the economy is the one that has not yet appeared: the impoverishment that will arise as an effect induced by forced inaction due to the coronavirus outbreak. For this reason a decisive role is played by finance, which will necessarily have to exert systematic support of an inevitably more fragile demand for credit. This is what the real estate experts at Nomisma envisage, a company which has presented via streaming, for obvious reasons, "l'Osservatorio 2020" (the 2020 Observatory) of the real estate market.

The Italian real estate market until 2019

This is what awaits us, in a picture that for Italy real estate until last year was in a fairly good position. According to the Nomisma CEO Luca Dondi, the intentions to buy a house within 12 months in 2019 were such that they could even quadruple the size of the market, despite a strong dependence on bank credit. Credit that was in any case sustained by the fall in rates and the consequent impulse for subrogation and mortgage replacements but also for new contracts that made debt less expensive. Another element of optimism was the fall in non-performing bank loans.

"If on the one hand the data show a decline in total mortgage disbursements", explains Dondi, "it is also true that this has not affected sales and purchases, supported by mortgages to a lesser extent but rose from 579 thousand in 2019 to 604 thousand. This is also thanks to the dynamics of prices, which in any case hint at starting on a path of recovery with Milan as a forerunner, with the most dynamic urban contexts towards an upturn and with the intermediate centres ready to follow the same trend. This is a recovery that was also visible from parameters such as the time spent on the market in decline".

This was more true for the residential sector, Dondi points out, while for the non-residential sector Milan was really alone on the road to recovery, even if the corporate segment with investments, with a prevalence of foreign investments, had been lively everywhere for about five years. Last year investments amounted to more than 12 billion, accounting for about 4% of the European total.

The variables of the slowdown in 2020

At the beginning of 2020, the economy in general had prepared for a slowdown, explains Elena Molignoni, head of the Nomisma real estate area. Growth in the last quarter of 2019 had been very limited, the gap between large centres and intermediate cities was becoming important and was increasingly based not only on economic variables such as prices and availability of spending, but also on the urban context and attractiveness, which were increasingly decisive for purchasing decisions. The climate of confidence of real estate agents was declining, and among the fundamentals that guide purchase intentions, the price/family income ratio was falling compared to the long-term average, while the ratio to rents was in line with this average.

Coronavirus: Nomisma forecasts for the Italian real estate sector

In this situation, what can we expect in the near future? Undoubtedly, real estate will pay a heavy price "despite the industry's ability to resist the deterioration of the economy before the devastating viral wave". Nomisma assumes two recessionary scenarios, one "soft" and one "hard".

In the less negative scenario, Nomisma's forecasts for the corporate segment are for a cumulative decline at the end of the next three years of 278 thousand residential transactions (48.4 thousand in 2020) and 9.4 billion euros in invested capital (2.6 billion euros in 2020). In the most pessimistic scenario, the collapse would amount to 587 thousand units (118.8 thousand in 2020) and 18.3 billion euros in invested capital (5.8 billion euros in 2020). With regard to the residential sector, Nomisma expects a loss of between 54.5 and 113 billion euros in turnover in the coming years (in 2020 it is between 9.2 and 22.1 billion euros). With reference to prices, the Bolognese company estimates average decreases between -1.3% and - 4% in the two-year period of 2020-2021. For 2022, Nomisma estimates a timid decline in values.

One of the factors that will slow down the recovery for Nomisma will be the already repeatedly mentioned inefficiency of real estate values, unable to adapt to the changed conditions. The overly extolled resilience will risk proving, once again, to be only an apparent safeguard factor.

The future propensity of households to increase their savings reserves will also have to be considered, as a priority, in order to "increase liquidity to protect themselves against further economic downturns".

The global macroeconomic framework

"The present situation is part of a global crisis that began at the beginning of the year due to a real structural fact, that of the Chinese economy slowing down," explained Lucio Poma, chief economist at Nomisma. "This had already caused a drop in the price of copper and an increase in the price of gold, an indication of an expectation of a slowdown in industrial activity and greater use of the metal as a refuge. The virus has then further blocked activities in China, an event that adds to the crisis of the OPEC cartel that led to the collapse of oil prices, while the pandemic is stopping them all over the world".

Deflation coming for the Italian economy

On the subject of oil, the OPEC cartel saw Russia's exit from the agreement following the decision to increase production in order to drive prices down further, despite a situation of declining global industrial activity. Why was it decided in this way? "These are predatory prices," explains Poma, "to grab the few market shares that will remain active in this situation."

What connection does all this have with the Italian economy, already marked by a recession even before the coronavirus? Simple: "What happened with oil," explains Poma, "will happen for any consumer good. We will see prices fall to take ever smaller market shares due to unemployment and wage cuts. This will cause the postponement of important consumer choices such as buying a house. At this moment Italian companies must hold their position because if foreign competitors take over, the repercussions could be serious".