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A home is a luxury, now more than ever

Housing affordability as a general concept means having enough money to pay for the cost of buying or renting a place to live. In lieu of an official definition (either at a national or international level), housing affordability is measured as the ratio of the cost of housing to income. The widely accepted threshold is 30%; any higher than that and housing is not considered affordable.

In Italy, the average level of affordability in 2021 was below 30%, and in the past ten years, this marker improved at an almost constant rate. Over time, in fact, the weight of housing costs has shrunk. Specifically, in 2012 the ratio nearly hit 48% (an average family with a mortgage on their house spent almost half of their income to pay the installments), while in 2021 that percentage dropped to just under 28%.

Several factors drove this downturn: interest rates remained very low owing to monetary policy. Added to this, income ticked upward and housing prices slid down, trends that impacted our country in the timeframe in question until 2019.

Since 2020, with the onset of the pandemic and the economic crisis that ensued, we have seen a partial reversal in the paths of these variables. The residential housing market proved to be a dynamic one, with prices rising in 2020 and 2021; the downturn in interest rates was interrupted in 2021 after monetary policy had been further expanded in 2020 in response to the pandemic to prevent a credit market shutdown. Last, incomes slumped in 2020 due to the economic obstacles that emerged from anti-pandemic restrictions, to later recoup during the following year (+3.8% at current prices, according to the Bank of Italy’s Annual Report for 2021). Consequently, the downward trajectory in the ratio of housing costs and income was interrupted, and the value rose slightly in 2020 and 2021 as compared to 2019.

How does the situation change if we zoom in on local areas? Let’s take a look at housing affordability in Italy’s regional capital cities in 2021. The least affordable cities are Venice (which tops the list at 53.6%), Florence (52.5%), Naples (47.1%), Bologna (44.7%), Rome (44.2%) and Milan (43.6%). The situation is somewhat better (but still not ideal) in Genova (38.4%), Cagliari (37.7%), Bari (36.9%), Torino (34.1%), Trieste (33.9%), Aosta (30.7%) and Palermo (30.2%). On the other end of the affordability spectrum, we find Potenza (29.3%), Ancona (27.9%), Campobasso (27.4%), Perugia (27.3%), Catanzaro (25.6%) and L’Aquila (the most affordable region capital by far, at 20.5%).

The first datum to point out is that people can’t afford to buy a home in as many as 11 out of the 19 cities listed above if once again we take the 30% ratio between housing costs and income as the maximum threshold for housing affordability. Second, surprisingly, Milan does not top the list as the least affordable city: the regional capitals of Veneto, Tuscany, Campania, Emilia-Romagna and Lazio record higher ratios (which means less affordability) despite the fact that the price of real estate per square meter is lower there than in Milan. This apparent paradox can be explained by the low income levels in these cities, which offsets the difference in property values, resulting in a higher rent/income ratio.

If we take a closer look at the city of Milan, divided into zones by the OMI (Italy’s Real Estate Observatory), no area appears to be affordable. Neighborhoods on the outskirts of the city have a ratio between 30% and 60%, and as we move toward the center, housing affordability gets even worse, with figures topping 60%.

Pulling back again to a wide-angle view, how will housing affordability evolve in Italy in the coming months? Naturally the trend in this ratio will depend on the evolution of the constituent variables. Specifically:

  • Income projections are on the rise for 2023, which will have a positive impact on affordability.
  • The ECB has announced additional interest rate hikes, which will generate negative fallout on affordability.

Finally, housing prices rose in the second half of 2022, and in 2023 the predicted downshift in demand will be a determining factor, also in light of the inverse relationship between the number of standard transactions and interest rates over the past decade (a correlation of -0.67% from 2010 to 2021). This will be followed by a slowdown in prices, which will rise in 2023 but less dramatically than projected in recent months (+0.7% versus +2% predicted in July, according to Nomisma data).

So in 2023, we are likely to see the level of affordability deteriorate due to the joint effect of the three variables mentioned above. In an attempt to make an estimate on the basis of the data we’ve cited, and a hypothesis on income trends (a rise in current prices pegged at the average for the years leading up to the pandemic), what becomes apparent is the greater weight of housing costs on income. (The growth rate in income applied for 2023 is the average for the period running from 2013 to 2019; this timeframe was chosen to exclude the years where the trend skewed from the norm due to the crisis and successive recovery.) What’s more, even if we’re being optimistic and set the rise in nominal income on par with 2021 (when there was an economic rebound from the year prior), for 2023 housing affordability would still be worse than before.
In any case, the cost of buying a home in Italy is just shy of what’s considered affordable. Clearly this percentage should be reduced, all the more so if we consider that for families in the medium- to low-income bracket, even a ratio below 30% may not be affordable, as they would not have enough money left over to cover the costs of basic necessities.
What can the government do to improve housing affordability? Policies that can be deployed to contend with this crisis may include increasing the credit supply or easing the conditions for accessing credit. Considering the ongoing credit squeeze, we believe local and national authorities should intervene to expand the housing supply, and remove physical and legislative barriers that limit available housing in the long term. Other policies that can be implemented in this direction would serve to:

  • provide incentives to private developers to create residential buildings at affordable prices (social or public housing) via subsidies or tax credits for projects that meet specific requirements;
  • introduce housing vouchers to support people in medium-low income brackets and design residential areas in an inclusive way, with a fixed quota of accessible units in new buildings.