Tripling Mortgage Rates Lead to Decline in Home Sales

Tripling Mortgage Rates Lead to Decline in Home Sales

Significant Impact of High Interest Rates on Italian Household Spending

The high interest rates have greatly impacted the credit landscape and reshaped the spending plans of Italian families. The rates that banks charge on mortgages granted to families have seen a remarkable increase, tripling in a short span of time. According to data gathered at the end of December, the average interest applied to real estate loans had reached a staggering 4.40%, which is three times the 1.45% seen in January 2022, the lowest level in recent years.

This significant increase was highlighted in an analysis done by Fabi. The study pointed out the “dizzying climb” of 295 percentage points in just 24 months that led to a decline in the stock of mortgages by 2.3 billion euros during 2023. This equates to an average monthly decline of 192 million euros. This occurred despite the increase of over 35 billion recorded in the previous two years, thanks to the 18.3 billion more in 2021 and the growth of 17 billion achieved in 2022.

The Delicate Balance Between Interest Rates and Inflation

According to Fabi, the data from the last 12 months show that the delicate balance between interest rates and inflation has put a strain on Italians’ ability to borrow. This has negatively impacted investment in real estate. The real estate market, in general, and sales, in particular, have suffered. Sales significantly decreased last year, causing the percentage of Italians who go into debt to buy a home to fall from 50% to 41%, with sales dropping by almost 12%.

The Potential Impact of ECB Rate Cuts

The banking union notes that the real estate market could potentially see a turnaround if the European Central Bank (ECB) decides to start a rate cut and adopt a more expansionary phase for credit. However, there are doubts over how quickly Italian families will respond to these incoming cuts and the slow impact they might have on the cost of borrowing. As it stands, the data on loans and the pressures on the Italian real estate market are negative, largely due to the ECB’s constant efforts to increase the cost of money as a means to curb inflation.

The Evolution of Mortgage Amounts

In January 2021, the amount of the mortgages was 392.3 billion, according to Fabi. During that year, it increased at a rate of 1.5 billion per month, closing at 409.9 billion in December. Over the subsequent 12 months, the pace of growth slowed slightly to 1.4 billion, with the total reaching 426.9 billion at year-end from 410.3 billion in January. However, 2023 marked a reversal and slowdown. The first drop of around 600 million was seen in January (stock at 426.2 billion), followed by a gradual decrease up to 424.6 billion last December. The average monthly decline was 192 million, for a total of 2.3 billion euros over 12 months (-0.54%).

The data, which have been reworked based on the Bank of Italy statistics and do not include any securitisations, show that the amount of real estate loans has systematically grown alongside favorable rates. This growth slowed significantly when the dynamics of the cost of money worsened.