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Germans Splurge on Italian Homes Locals Can’t Afford

“This is a good time for foreigners to buy,” Francesca Andreini, owner of Case e Ville

Real estate sales in Italy plunged 26 percent last year

 bloomberg

By Alessandra Migliaccio, Chiara Vasarri & Dalia Fahmy - May 7, 2013

Yasemin Rosenmaier has been selling homes in northern Italy since 2005 and she’s finding that there’s never been a better time to work for a German broker.

Residential sales in Italy dropped almost 26 percent last year amid a plunge in mortgage lending, almost two years of recession, and uncertainty surrounding a new tax on primary residences. House prices have dropped 12 percent in real terms from the 2008 peak, reaching levels last seen in mid-2004, according to Bloomberg calculations.

April 30 (Bloomberg) -- Davide Serra, founding partner and portfolio manager at Algebris Investments, and Jose Miguel Mate, chief executive officer of Tressis SV, talk about Europe's economies. They speak with Guy Johnson and Francine Lacqua on Bloomberg Television's "The Pulse."

Second-home sales to buyers from abroad rose 14 percent last year, with non-Italians spending 2.1 billion euros ($2.8 billion), according to research institute Scenari Immobiliari. Photographer: Alessia Pierdomenico/Bloomberg

“I’d say 60 percent of our closings are with Germans, which is much higher than in previous years,” Rosenmaier said by telephone from her Engel & Voelkers office in Cernobbio on Lake Como. “Why? Fear of inflation, the uncertainty on the financial markets, fear of what happened in Cyprus,” the latest European country to get an international bailout.

Foreign investment in Italian holiday properties is rising as Germans, Britons and Russians take advantage of a market where locals are struggling to purchase even a first home. Residential sales in the country dropped almost 26 percent last year amid a plunge in mortgage lending, almost two years of recession, and uncertainty surrounding a new tax on primary residences.

Second-home sales to buyers from abroad rose 14 percent last year, with non-Italians spending 2.1 billion euros ($2.8 billion), according to research institute Scenari Immobiliari. Germans, the biggest buyers since 2009, accounted for almost 40 percent of the transactions by foreigners, followed by the British at 18 percent and Russians with 13 percent.

“This is a good time for foreigners to buy,” Francesca Andreini, owner of Case e Ville, a real estate agency based in Siena, Tuscany, said in a telephone interview. “Properties that cost 2.5 million euros have come down to 1.5 million euros due to taxes and the economic downturn.” Prices can drop by as much as 30 percent during negotiations, she said.

Merkel Blamed

Germans are increasingly buying property in Italy even as some politicians and the media in the country say that demands for austerity are deepening its economic slump.

German Chancellor Angela Merkel has been criticized by Italian leaders including former Prime Minister Silvio Berlusconi and Beppe Grillo, the ex-comic leader of the Five Star Movement that received a quarter of the vote in February’s election. Il Giornale, a newspaper owned by Berlusconi’s brother Paolo, last year published a picture showing Merkel raising her right arm in salute with the headline “Quarto Reich” or Fourth Reich.

That didn’t stop Merkel from choosing a hotel on the Italian island of Ischia last month for a vacation. Many of her fellow citizens are following suit with more permanent investments spurred by Europe’s fiscal woes.

Inflation Hedge

German demand for holiday homes grew significantly in the past five years, according to a survey conducted in June by Hamburg-based Engel & Voelkers and vacation-rental website HomeAway.com. About 43 percent of the respondents said they consider vacation homes a form of retirement savings and a quarter saw them as a hedge against inflation. Most of the properties are bought in Germany, followed by Spain, Austria and Italy, the survey found.

Italian homes were sold to foreigners for an average of about 500,000 euros last year, according to data compiled by Scenari Immobiliari. That’s a high price for Italians, who on average earn 19,655 euros a year, according to Finance Ministry data, compared with Germans who make 36 percent more, or 26,791 euros.

They’re seeking assets abroad after the European Central Bank’s policy of cutting interest rates to record lows fueled concern about inflation in Germany, even as the economic outlook elsewhere in the euro area worsens.

Divergent Economies

Italy’s economy is set to shrink 1.4 percent this year, according to economist forecasts compiled by Bloomberg, whereas Germany’s is poised to expand 0.6 percent. German unemployment is holding close to a two-decade low and figures today from the Economy Ministry in Berlin showed factory orders unexpectedly jumped for a second month in March.

Real estate sales in Italy plunged 26 percent last year, according to Finance Ministry data. Residential transactions amounted to 88.1 billion euros, Scenari Immobiliari’s research showed.

House prices fell 4.6 percent in the last quarter of 2012 from a year earlier. They’ve dropped 12 percent in real terms from the 2008 peak, reaching levels last seen in mid-2004, according to Bloomberg calculations. Values are likely to fall another 5 percent this year, according to the real estate research unit of the Bologna-based Nomisma institute.

“The decline in sales was a surprise, because we thought we had touched bottom or close to it in 2011,” said Luca Dondi, head of Nomisma’s real estate research unit. “There’s need for more credit from banks; without that, the decline in prices won’t be enough to restart demand.”

Property Tax

Italy’s already weak housing market worsened after former Prime Minister Mario Monti introduced a tax on homes, known as IMU, in December 2011 as part of a package of measures aimed at cutting Europe’s second-highest debt to avoid a possible bailout.

Repealing the tax was a central part of a campaign by Berlusconi’s People of Freedom party, which won a blocking minority in the Senate in the February elections and became part of the governing coalition with Prime Minister Enrico Letta’s Democratic Party last month.

While Letta has agreed to suspend the next payment of the levy due in June and work with parliament to review the tax, Berlusconi has already threatened to withdraw his support for the government if the tax isn’t abolished.

“Letta has given a very positive signal for the property sector,” Paolo Righi, head of Italy’s FIAIP real estate federation, said in a May 3 phone interview. “Now he needs to put words into action”

Mortgage Lending

Homes acquired with a mortgage fell to 56 percent in the fourth quarter from about 64 percent a year earlier and 73 percent in the second quarter of 2011, according to Bank of Italy data. It’s also taking longer to sell a home, with the average duration rising to 8.5 months at the end of 2012 from 7.6 months in the fourth quarter of 2011, according to Bank of Italy data.

New mortgage lending dropped about 42 percent last year, according to a report published by CRIF and MutuiSupermarket.it. Italian banks have curbed lending as the euro-region’s third biggest economy remains mired in its longest recession in two decades and Italian unemployment has stayed near a 20-year high, or more than 11 percent.

Homeowners are also increasingly struggling to repay loans. The default rate for residential mortgage-backed securities rose to 2.8 percent in February from 2.6 percent a year earlier, according to Moody’s Investors Service, which tracks 83.4 billion of the transactions.

Still, the country had a homeownership rate of about 73 percent in 2011, higher than the European Union average of 67 percent, according to research company Eurostat.

Greater Choice

That all means lower prices and greater choice for Germans and other foreigners seeking a Mediterranean retreat. Buyers are showing interest in more expensive properties than they had sought in the past, according to Scenari Immobiliari.

Germans are becoming more savvy about the country’s market, choosing homes in regions with a similar countryside to the popular Tuscany region for lower prices, said Marco Rognini, group sales manager for Engel & Voelkers in Italy. Tuscany and the Adriatic coast remain the most popular destinations, he said.

The towns and villages around Lake Como have long been favored by the wealthy, and the area’s best-known homeowner is Hollywood actor George Clooney, who has his own villa. While Engel & Voelkers’ clients may have other reasons for buying in Italy, Rosenmaier said, some things never change.

“Why in Italy?” she said. “Italy is the country of sunshine. Italy is not Germany.”