Inflation, war: the consequences for the Italian real estate market
Inflation is never good for the real estate market. Sooner or later, it prompts the Central Bank to raise the prime rate, that is, the interest rate that they apply banks when they borrow money, the same money they borrow to issue mortgage loans. The latter become way more expensive which obviously affects the demand for real estate acquisitions. Inflation in Italy was limited to 1,7% for the whole of 2021. That was because at the beginning of last year inflation was even very slightly negative because of falling demand, for instance for oil and gasoline and for other goods due to the pandemic situation. Indeed, in the last few months inflation was well above 4% on average, compared to the same months of 2021. The problem is that in the medium-term, inflation seems bound to increase.
Here are the main inflationary factors in the present and medium term economic landscape:
- Energy prices have increased by more than 40% compared to a year ago. Especially gaz, gasoline and diesel are way more expensive.
- The war in Ukraine can only worsen the situation. In order to fight back against European sanctions, Russia could even suspend gas deliveries to Europe. Italy alone imports 45% of its gas from Russia. Shutting down the gas tap, Russia could severely damage the Italian economy, since not only would gas prices skyrocket, but also some industries would be compelled to severely diminish or even alt their production. Diversification is possible, Qatar will enormously increase its production by 2024, renewable energies are now competitive and Italy could increase its gas production to cover 15% of its needs (
it was 17,000,000,000 m³ in 2000, it’s now only three billions cubic meters). Nevertheless these measures takes time.
- Wheat will only become more expensive because of the war. Italy imports 100 m of wheat from Russia every year, and a 120 million tons from Ukraine. Both countries are going to drastically reduce or stop their expectations to Italy, the former because of sanctions, the latter because of the war.
- Sanctions against Russia would prevent Russian companies and citizens to invest or spend money in Italy. In general, about 300 companies involved in exchanges with Russia are at risk for our country, which in 2021 alone exceeded 4 billion euros. Italy exports 7 billion a year of products to Russia and imports 12.6 billion of gas and raw materials, in particular steel. And let’s not forget that, indirectly, Ukraine will also stop exporting the raw material that is basic for Italy of pasta: wheat, of which we import at least 120 million kg per year (in addition to the 100 million imported from Russia).
Nevertheless the war could have some positive effects on the real estate market
Although these effects are unlikely to compensate the above-mentioned negative effects, they are:
- The European central banks, although inflation is high, could hesitate to drastically increase its interest rates, in order not to suffocate the economic recovery that was taking place after the pandemic
- Since other investments are risky, savers could choose real estate as a safe harbor
In the end, war is never good for the economy. Therefore, cunningly analyzing the situation and anticipating the damaging effects of conflicts can avoid dramatic consequences.