Real estate market: the situation of mortgage interest rates
tassi mutui mercato immobiliare

The real estate market and its dynamics have a strong connection with the dynamics of financial markets. In particular, trends in the number of purchases and sales, and ultimately also in price levels are affected by trends in interbank interest rates, that is, those interest rates charged by banks for lending to each other and used as a benchmark and indexing of loans/deposits by banks to households and businesses.

The actions of the European Central Bank and inflation trends

Since the summer of last year, the European Central Bank (ECB) has implemented a number of actions to raise the level of interbank benchmark rates. However, these actions, made necessary in order to control inflation, have had further effects on the balance sheets of households and businesses, which from time to time see the amount of the installment of their mortgages increase when these are based on variable interest rates.

In recent months, the gradual rise in the level of interest rates has driven households and businesses away from the tool of mortgages for home purchase and consumer loans, affecting the housing market and productive markets in general.

Against a backdrop of exceptional uncertainty, Eurosystem experts have revised upward their projections for inflation, which would average 8.4 percent in 2022 before falling to 6.3 percent in 2023. Inflation is expected to decline markedly in 2023 and then average 3.4 percent in 2024 and 2.3 percent in 2025. Excluding the energy and food component, inflation is expected to rise to 4.2% in 2023, then decline to 2.8% in 2024 and 2.4% in 2025.

These dynamics will have sure repercussions on interest rate trends, which will move accordingly.

The use of bank debt in home purchase

ISTAT, the Italian statistical institute, censuses the number of housing unit purchases and sales that are concluded in Italy on a quarterly basis, with regional reference, and the number of mortgages taken out with real estate mortgages established.

On average, in the years from 2000 onward, about 199,000 contracts were concluded each quarter (or about 800,000 contracts per year), while an average of about 106,000 mortgages were concluded each quarter (or about 425,000 mortgages per year).

Thus, on average, for every 10 homes bought and sold, five have historically been bought (or at least financed) with a mortgage; this ratio provides a clear snapshot of how much the housing market depends on whether or not families and businesses are able to access, on acceptable terms, a mortgage.

The real estate and mortgage market in the latest ISTAT survey of 2022

In Q3 2022, there were 220,995 notarized sale and purchase agreements and other agreements related to deeds of transfer for consideration for real estate units (-2.7% from the previous quarter and -1.0% year-on-year). Ninety-four.7 percent of the stipulated agreements concern transfers of ownership of real estate for residential use (209,365), 5.0 percent those for economic use (11,054), and 0.3 percent special use and timeshare agreements (576).

Notary agreements for mortgages, loans and other obligations with the establishment of a real estate mortgage total 95,945 (-5.5 percent compared to the previous quarter and -7.4 percent year-on-year). The decline is homogeneous throughout the territory, both on a cyclical and annual basis.

Outlook for the medium term

As outlined above, the mortgage market is closely linked to interest rate conditions, which in turn reflect the ECB’s actions to curb inflationary phenomena.

The willingness to reduce them by tightening the cost of money, in the short run, will surely keep the cost of a mortgage high and consequently keep the use of bank debt low.

But since the construction industry and the housing market represent items of GDP (Gross Domestic Product) that are too important for countries, it is expected that such measures will be weighted with an eye toward them.

Unfortunately, weighing heavily in these dynamics are the negative effects on macroeconomic scenarios of two major events that have marked the world and Europe: those of the Covid-19 Pandemic, which marked the years 2020 and 2021 and is still showing its effects on commodity and product costs, worldwide. And in Europe, the events related to the Russian-Ukrainian conflict, which is fueling uncertainty in financial markets and ultimately impacting real economies.