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Real estate benefits from economic boom.
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Author: d'Aquino, Niccolo
Section: CAPITALS: Real Estate
ROME
| REAL ESTATE BENEFITS FROM ECONOMIC BOOM |
AN OVERVIEW OF CURRENT AFFAIRS IN EUROPE'S CAPITAL
This month we asked
of our capitals correspondent to write about buying a home in his or
her respective country. From Ireland's building boom to the rising
number of co-ops in Swedish cities to the high percentage of Finnish
Homes that feature saunas, the European real estate market can best be
described as a complex and varied landscape.
Italian real estate
would like to express its gratitude to the stock market boom. For a
decade, Italians had almost stopped buying houses, mainly for two
reasons soaring prices and extremely high taxes. Taxes on home sales
vary between 4 percent and 11 percent, depending on whether it is to be
the main residence or a second home, and annual taxes range between 27
percent to 34 percent.
Now, though, there
are very clear signals that things are about to change, that there is a
renewed interest in real estate investments. The merit goes to the
flood of liquid assets created by Piazza Affari, the stock market
located in Milan, which, although small, is racking up world records in
growth rates. The thrifty Italian saver, in part satisfied with having
tripled and sometimes quadrupled his stock investments, and in part
worried that sooner or later this bonanza is going to end, is starting
to view real-estate once again as a shelter. Everyone had been taken by
surprise by this sudden disinterest in buying houses. Italians are well
known for putting their family first; as soon as they have a bit of
money put aside, they use it to get a real estate mortgage. The dream
of being a homeowner was--and is--very important in Italy, as
elsewhere. So much so that in the past twenty years, the percentage of
families living in rented apartments had fallen heavily--from 41
percent in 1979 to less than 23 percent in 1996. Consequently, during
that same period, the number of Italians living in homes they own
increased from 59 percent to 77 percent.
But one must keep in
mind the very particular situation that exists in Italy in order to
understand this race to buy houses, which would seem to contradict the
crisis in the real estate market.
One thing, above all,
keeps the market from reflecting the true situation the very consistent
amount of real estate owned by public institutions. Big private real
estate companies, like those that exist in US, are rare in Italy; they
own less than 7 percent of all apartments. The majority, more than 67
percent, is divided up in the hands of small owners, very often people
who own only the house they live in, or at most, a second home at the
seaside or in the mountains.
However, the fact
that public institutions own 25 percent of the buildings causes a
majority of the shortage. Consequently, politics have always played a
role in the real estate shortage. All of the Italian governments that
have risen and fallen since the end of World War II have traded support
for low rents for electoral support from the powerful renters'
associations and left-leaning parties. The meager "political" rents of
this vast number of public apartments have kept the market on the
decline.
Now, though, the
government is forcing public institutions to sell at least a part of
their real estate holdings to create new liquid assets to invest in the
market. The unions agreed that these houses could be sold but argued
that the people renting them should be given the first option to buy
them and at a discounted price. Contractors and real estate agents
protested, saying that this would inflate the market and make it
impossible to build new apartments. Interference by political power has
caused real estate to become increasingly unappetizing as far as
investments are concerned.
The market, however,
is now beginning to register a slight revival. Insiders say that the
negative cycle, which has lasted over a decade, is almost over.
Moreover, the center-left government led by Romano Prodi has given a
helping hand. The prime minister has pushed for lower interest rates on
bank loans for buying primary residences, bringing them down to the
lowest levels in the past forty years and putting them on a par with
the European average between 4.5 percent and 7 percent. Furthermore,
for the first time, tax benefits are available to homeowners who would
like to renovate and modernize their homes. For the next two years,
they can deduct 41 percent of the renovation costs from their tax
returns. This applies not just for their home but for any other
buildings they own. The plan behind this unexpected generosity is to
put older houses on the market as well.
The first results
indicate that it is working. Homeowners everywhere in Italy are
planning renovations in the kitchen, the bathroom, or the children's
room. Secondly, real estate investments, although they aren't offering
incredible returns, at least appear interesting again. The gross yield
has increased an average 6 percent. Subtract 2 percent for tax
incidence e and 1.8 percent. for inflation, and you come up with a net
interest of 2.2 percent. Not much, but better than before. Above all,
young couples are again encouraged to buy a home, whereas before they
were the first to give Up their dream of building a "nest." Inheritance
taxes have also been kept low. An inheritance from parent to child is
tax-free up to a maximum average value of $150,000. Above this amount,
and when a non-luxury home is involved, the tax is 3 percent.
Two factors indicate
just how appealing real estate investments are becoming. First, the
number of apartments that are being rented out has increased by 4
percent. Again, the government gets the credit. It is eliminating the
"political" rents, which allowed certain tenants to live in big,
centrally located apartments at a ridiculously low rent. Speeding up
the legal process allows owners to rescind rental contracts and regain
possession of their house. Until now, this took up to ten years and an
infinite series of bureaucratic procedures. For this reason, many
owners preferred to keep their houses empty, although this meant not
making any income.
The second factor
comes from Germany. The Deutsche Bank has initiated an investment fund
in Italy dedicated to real estate investments. It is the first bank to
do so. According to the director of this operation, Gerardo Solaro del
Borgo, the net return for investors could reach 5 percent.
~~~~~~~~ By Niccolo d'Aquino
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