During periods of high inflation, fear of the loss of purchasing power of money has driven capital into the real estate market. In fact, during the two primary inflationary cycles that led to a general rise in prices, the residential real estate market performed well in buying and selling. “In the early 1960s, when inflation reached 8 percent, the boost to the real estate sector was essentially due to the extraordinary real estate supply on the market generated by post-World War II reconstruction, accompanied by a demand for homes that looked to a new model of living,” explains Diego Vitello, analyst Gabetti’s research office. “In 1983, when inflation reached an all-time high of 20 percent, leading to hyperinflation, the general increase in prices was also reflected in real estate prices to the extent that it led to a ‘house rush.’ Buying the home was considered a haven for one’s savings while selling an extraordinary opportunity for real estate appreciation.”
Photo Diego Vitello, analyst Gabetti
The link between inflation and real estate
“Historically, the correlation rate between house values and inflation trends has been quite high in the Italian real estate market. A growth has matched the growth in inflation in the price of real estate,” says Francesca Zirnstein, managing director of Scenari Immobiliari. “This evidence, which was particularly important until 2000, confirms the rule of the real estate market that in the long run, the value of real estate recovers from inflation,” Zirnstein continues, pointing out that “with the new century, the correlation index, however, has decreased, dropping from 0.8 to 0.7 to 0.4 (it was 0.5 at the end of 2021). In a national but also international context of meager inflation, the performance of the two indicators has been independent, and the change in prices has depended more on other factors, especially the general economic difficulties and the structural characteristics of the domestic real estate industry.”
Photo Francesca Zirnstein, Scenari Immobiliari
“In the second decade of the new century, the cost of money throughout Europe was meager; demand was able to take out mortgage contracts at meager rates, with yields in the bond segment tending toward zero. Demand, therefore, directed investment to the real estate sector because, among the allocations considered solid and safe, it was the one that allowed the highest margins,” Zirnstein continues, pointing out that residential real estate guaranteed, on average, 3.5 percent, against a mortgage cost of 1-1.5 percent.
Demand in the absence of oversupply pushes up real estate prices. Although this dynamic did not have the same effect throughout Italy as a national average, it acted prominently in the country’s most dynamic markets, including Milan and Rome.
Rising inflation: what’s happening to rates and houses?
Now, however, inflation is back on the rise worldwide, including in Italy. In fact, according to Istat data, inflation came in at 8.4 in August. At the same time, the ECB ended the extremely expansionary policy of recent years. Thus in July, it decided to raise the cost of money by 50 basis points, up from the 25 announced in June. In September, it raised them further by another 75bp, intending to curb the run of inflation and steer it toward the target level of 2 percent. An initial backlash from this increase spilled over into the 3-month Euribor, which quickly rose from -0.24 percent in June to 0.20 percent at the end of July, then around 0.50 percent.
After years of expansive monetary economic policy that has made BTPs at historic lows, reaching yields around 0 percent in 2020, we are seeing a rise in the net yield that has exceeded the 3 percent ceiling. This means that if until a few months ago the gap between real estate market yields and Btp yields was in favor of the former, today we are in a situation of substantial balance,” says Vitello. He then adds that what will make real estate investment more appealing than Btp yields is the quality of urban transformation projects to regenerate the territory not only from a real estate point of view but also from an economic and social point of view.
Right now, we are in a bullish phase, with rising prices and volumes, but those who invest in real estate always have a medium- to long-term perspective, considering the market’s cyclical nature. In addition, it is necessary to distinguish between those who buy to make a real estate investment and those for direct use,” explains Fabiana Megliola, head of the Tecnocasa group study office. “Currently, the home is becoming the outlet to employ capital accumulated in the lockdown, and many are making home improvement purchases. In addition, the fear of losing money value is shifting a lot of capital to brick.
Photo Fabiana Megliola, Tecnocasa
How much can a real estate investment return?
In general, “real estate investment yields around 4.9 percent gross annually. Rents revalue with inflation, provided that one does not resort to the coupon regime, which implies the renunciation of the annual updating of the rent to the cost of living,” comments Megliola. “In this period, increasing rents could cause failure to pay, especially for families with low incomes who are already facing increases in expenses.”
The last word then goes to Vitello: “Compared to the trend of an upward inflation curve and a rising interest rate environment that characterizes uncertainty among investors, real assets, such as residential real estate, constitute a haven asset precisely because of their defensive characteristics from economic turbulence,” comments the Gabetti expert, who then concludes by saying that “in the current context, in fact, those among investors who intend to expand their asset allocation see possible returns, especially in the asset classes of innovative living, logistics, and offices.”
