Property prices in Italy are expected to fall further in 2014 with a weak domestic economic outlook affecting the residential real estate market.

House prices have declined in real terms by 5.8% year on year since 2012 and the trend appears not to have stabilised, according to the latest analysis report from Fitch Ratings.

It points out that figures from Nomisma also show that the real estate market has also contracted in terms of the number of sales by about 8% year on year.

Fitch expects the current housing market cycle to be driven by the slow economic recovery, which will take time to reflect in stronger and increasing houses prices. Fitch expects further nominal house price declines of about 4% between now and the end of 2014.

The Italian economy is expected to have exited recession in the fourth quarter of 2013, although any recovery is likely to be slow, the report points out. ‘The private sector entered the crisis with a healthy balance sheet, although the rising unemployment and the tight credit conditions are still potential threats and individuals’ purchasing power is weighed down by still tight credit conditions as well as fiscal headwinds,’ the report says.

The agency believes that the mortgage rates are likely to remain stable, although significantly higher than in the core European Union countries. However, the persistent stress on employment and real wages will continue to affect mortgage affordability.

But it also points out that the average interest rates on new mortgages has remained rather stable over the past 15 months at 4.7% as of the third quarter of 2013 compared with 4.8% in the second quarter of 2012 and the European Central Bank policy rate is expected to remain low.

However, mortgage arrears are still increasing, though to a lesser extent. They increased by 8% year on year in 2013 compared to 9% year on year in 2012. ‘This confirms the persistent constraints on borrower’s incomes created by the general macroeconomic and unemployment challenges, although some sign of recovery is likely in early 2014,’ the report says, adding that a medium term rise in rates is likely to result in an increase in arrears.

Fitch expects 2014 lending volumes to remain subdued as the domestic recovery, expected to take place in 2014, is likely to be weak. However, the agency believes that the residential mortgage volumes should slightly expand, thanks to the lower cost of credit of loans to individuals compared to other borrower segments.

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