The two-factor model of real estate prices

The recession and high interest rates are holding Italian property prices down. Changes to come!

Two important factors for the development of real estate prices are the development of national income - also represented by the real growth of the gross domestic product (GDP)  and inflation - and interest rates. While real estate prices usually rise with the growth of the gross domestic product, rising interest rates are a damper for the property prices.

Yesterday, Eurostat published its first estimate of the European growth for the third quarter  of 2013. In general, the European economy is stagnating. While the whole area just has a real growth of 0.1%, Italy had a growth of -0.1%, so "about the same". Yet, real GDP of Italy was almost 2% below the volume last year. Inflation, on the other hand is below one percent in Europe as a whole and in Italy. Taken together one could certainly say, no price pressure from the income side.

Long-term interest rates are relatively high in Italy. Benchmark 10 yr. Government bond yield were 4.25% in Italy (average October), while they were only 1.76% in Germany. Thus, they were about 2.5 percentage points higher in Italy compared to Germany. This, high nominal and realy interest rate in Italy could be one factor for the relatively sluggish real estate prices in Italy.

With rising growth and falling interest rates - typically a scenario one would expect in the turnaround after the recession - we would also expect a turnaround of the Italian real estate prices. Watch out for these two factors.

Rolf T. Boeni
15 November 2013