The question of the moment is to understand whether real estate investment is still a bulwark to defend against inflation, which can be counted on to protect and deploy liquidity, which lies mainly in Italian banks.
Will house prices fall or rise?
Should you hurry if you want to invest in real estate? Opinions, even very authoritative ones, are often strongly divided.
Some predict a housing bubble bursting, especially in markets that have seen the price explosion, such as Milan, due to rising financing costs and the credit crunch already underway. Scarcity and increasing commodity costs, grid-less energy costs, and the bogeyman of unbalanced cadastral and tax reform may be further depressing factors in an already complex market.
The value of real estate is bound to rise anyway, buoyed by the boost in housing demand, the solid Italian propensity to invest in bricks and mortar, and the rush to buy safe-haven assets by an investor base in some geographic areas. Milan is in the lead and has expanded to include many foreigners who see it as a viable alternative to the now overpriced and competitive markets of other European capitals, such as London or Paris. After rising prices in the recent past, will we, therefore, see a further acceleration of the trend in the coming quarters?
Nobel Prize-winning economist Robert Shiller has consistently argued that inflation is the primary driver of real estate prices in the medium term. After rising prices in the recent past, will we, therefore, see a further acceleration of the trend in the coming quarters?
Real estate market phases from 1927 to the present day
Let’s consider whether the real estate has been an inflation-proof investment historically.
In a fascinating study published by Bankitalia, the Italian brick market from as far back as 1927 to 2016 was analyzed. According to the data collected, in almost ninety years, house prices have nearly tripled, going up fivefold in some large cities.
In real terms, house prices declined from 1927 to the early 1940s, while from 1946 to the second half of the 1960s, actual prices marked a slow ascent.
The phase of stability (the 1950s-60s) and the economic boom caused buying and selling and real prices to rise exponentially.
The first period of falling prices (1975- 1977) can be regarded as a brief pause between the two strongly rising phases. This phenomenon is due to the 1973-74 oil shock.
A further upward phase followed, lasting until 1980.
In 1985 there was talk of “brick nausea”: starting in the last months of 1985, few people were choosing houses as investments because of the supply of BOTs and Ccts.
In 1990, due to the collapse of the stock exchanges in October 1986, real estate again became the “safe haven asset” par excellence compared to an excessively volatile financial market.
Prices tend to rise from 2000 for seven years until the peak of the real estate cycle, almost tripling prices in real terms.
By September 2022, inflation in Italy had gone above 7 percent. According to Istat’s historical series, this is the highest figure since 1985. We have to go back 37 years, then, to find such soaring price trend growth and even further into the past to find a situation similar to todays.
It was 1973, and the West entered a long period of stagflation because of the oil crisis. The Opec countries led by Saudi Arabia cut production to make oil prices quadruple and punish the U.S. and Europe for their support of Israel in the Yom Kippur War (the parallels with today’s situation are apparent).
In that year, real rates, which had already been slightly negative in the previous years, sank to -16.5 percent at the end of 1974. They returned positive only in 1981 with the “divorce” between the Treasury and Bankitalia, then headed by Ciampi.
From 1973 to the early 1980s, galloping inflation resulted in double-digit price increases on every type of good and service purchased—those who had savings needed to learn how to place them and make them yield. To shelter themselves from fears of political instability and financial repression, many savers took their capital abroad, while the majority took refuge in bricks and mortar. This led to an explosion in house prices, which became the real “safe haven asset.”
What to do about the housing market today?
The ECB set interest rates today and is no longer Bankitalia; we have yet to see a real central policy to defend against inflation. Rates on investments are rising but less steeply than primary goods costs, inflamed by commodity shortages and an out-of-control energy market. There are no warnings of widespread social protests for the time being, but the malaise and impoverishment of the middle class are increasingly evident in Europe and the United Kingdom. Housing prices, at this stage, are consolidating their value and, in many areas, are rising rapidly.
The inevitable rise in the cost of mortgages will cause many to swerve toward renting and a season of new investment in properties to put into income, in the hope that the problem will not then become getting paid rent.
The real estate sector, then, will find itself between a rock and a hard place in a few months: the infusion of new liquidity to stem the crisis would be desirable, but today’s inflation at the same time requires an increase in rates to calm prices that show no signs of abating. And appropriate central bank intervention will be as essential as ever.
In the words of Warren Buffet, “It’s not about predicting the rain; it’s about building the ark.”
