Carlotta Scozzari, an economic-financial journalist for Business Insider, has just published a book with goWare, “False truths. 9 unshakable dogmas of economics and finance hanging in the balance after the Coronavirus pandemic", which is the result of a warm, but well thought out and documented reflection on the impact of the Covid-19 crisis on our (false) economic-financial certainties that have crystallized since the end of the Second World War.
Scozzari naked nine false truths – and probably much more: 1. The economy is global; 2. The world GDP will always grow, 3. The bank is at home, 4. Inflation has disappeared, 5. Oil will never go to zero, 6. Gold never betrays; 7. Brick always gives satisfaction; 8. The sharing economy and low cost are the future; 9. The green economy takes a very long time.
We are pleased to offer our readers an extensive excerpt from the book. The complete text of the seventh "false truth", the one concerning the stainlessness of the investment in real estate. It's a topic that can truly affect the wallet of all of us.
Happy reading
Trump's word
"Well, real estate is always a good investment as far as I'm concerned": word of the president of the United States, Donald Trump. The net wealth of the most powerful man in the world, accumulated largely thanks to business in real estate (the Trump Tower in New York is not called that by chance), in the summer of 2019 is estimated by Bloomberg at 3 billion dollars .
«First of all – Trump introduces himself in an interview with Larry King for CNN – I'm a real estate guy. This is what I love. Not recognizing him would be like not recognizing my daily work». Trump is certainly not the only one who thinks that bricks and mortar always give satisfaction within an investment portfolio. But is it really like this or is the Coronavirus unmasking this truth as well?
House prices down in 10 years
Already in the last decade, even before the Covid-19 came to upset our lives, anyone who had decided to invest in the old, dear Italian brick could easily have lost money. It is interesting to note that if, on the one hand, the index of prices for new homes travels above the starting level of 2010, on the other hand, the prices of existing homes have shown a strong contraction, which over the decade has pushed the entire basket downwards.
From a shorter-term perspective, comments on the ISTAT note at the end of March 2020:
«House prices closed 2019 with a decrease of just one tenth of a point compared to 2018 and with a slightly positive drag on 2020, a sign of a substantial stabilization of prices in the residential real estate market. But the national figure - ISTAT warns - is the synthesis of very heterogeneous territorial trends with the North-West and North-East growing and the Center and South and Islands decreasing. In this context, house prices in Milan recorded sustained growth for the fourth consecutive year, confirming their driving role in the real estate market, while in Rome they recorded a significant decline for the third year in a row».
Forecasts to be reviewed for the worse
In the last decade, average house prices have fallen. Above all, however, it shows that, in the absence of the Coronavirus and after a phase of stability in prices between 2018 and 2019, the rise in house prices should have started from 2020.
But the advent of Covid-19 has once again completely upset the plans, so much so that Nomisma outlines two different scenarios for the "prima Coronavisrus" (pC): a more optimistic one called "soft" and a more pessimistic or "hard" one. The first scenario, explained by Nomisma:
«It assumes relatively short exit times from the health emergency, together with consistent and effective measures; the second, on the other hand, implies longer times for the containment measures to be maintained and a lower effectiveness of the interventions launched by the government, with heavier repercussions on the economic system».
According to Nomisma forecasts, in the soft scenario, house prices should fall by 1,1 percent annually in 2020, by 1,2 percent in 2021 and by 0,5 percent in 2022. The declines are sharper in hard scenario: -3,1 percent in 2020, -3,9 percent in 2021 and -3,1 percent in 2022.
The same goes for office prices, for which Nomisma expects a drop of 2020 per cent in the soft scenario and 1,7 per cent in the hard scenario for 3,5, while for 2021 the estimates are for -1,6, 4 percent and -2022 percent and for 0,8 -3,4 percent and -XNUMX percent.
Before the virus or BC, they explain from Nomisma:
«The real estate market seemed to have embarked on the road to recovery, as could be seen from the evolution of residential sales, which in 2019 had exceeded 600 transactions, with the prospect for the next three years of remaining above this level, thus continuing the trend of growth. This was also thanks to the contribution of the credit channel which, after a negative 2019, was expected to expand again in the two-year period 2020-2021 in terms of mortgages to households for the purchase of homes, thanks also to the favorable conditions on interest rates interest, dropped to almost negligible levels.
Nomisma's analysis continues as follows:
«The emergency caused by the spread of the virus has completely changed this perspective, with the suspension of most economic and commercial activities, not least those related to the real estate sector. The objective difficulties of carrying out the most common economic activities that characterized the first phase of the advent of the pandemic will be accompanied in the coming months by wait-and-see and prudential attitudes that will differ in purchasing and investment choices. Given the high uncertainty that this completely unexpected situation is generating, households will give priority to increasing savings reserves, in order to increase liquidity to protect themselves against further economic downturns, postponing the purchase of real estate or other forms of investment.
They will find themselves facing particularly difficult economic conditions, with the far from remote possibility that those less equipped to deal with such a crisis will not be able to avoid going out of business. In order to avert or at least limit the scope of this phenomenon, in addition to the aid that the government will have to provide in terms of tax relief and deferred payment of taxes and credit debts, the role of credit institutions will be fundamental in terms of liquidity injection, precisely to avoid the economic and social instability that would otherwise arise".
Sales are also down
In addition to a reduction in prices, Nomisma estimates that from 2020 residential real estate transactions may also decrease, which has always been growing in recent years. Also in this case, the consultancy firm outlines a soft scenario which estimates a more contained decline and a hard scenario with a more drastic drop in sales.
«The effects of the spread of Covid-19 - explain from Nomisma - will take the form of a contraction in the purchase and investment demand and, therefore, in a decrease in the transactional activity of the real estate sector. The high "housing need" demonstrated by our periodic survey of Italian households will undergo a time delay, as a consequence of prudent choices. To these elements will also be added the economic difficulties that many families will have to face following the employment problems that the crisis will inevitably bring about. This situation, in all likelihood, will push credit institutions to tighten the disbursement criteria, in order to avoid the risk of accumulating again a large amount of non-performing loans (see also chapter 3).
All of this, sums up from Nomisma, «together with the impediments caused by the virus containment measures, will contribute to reducing transactional activity on the residential market in 2020: from the 612 trades assumed in the absence of the Coronavirus emergency, we will move on to the best of cases to 564 transactions (-6,5 percent compared to 2019), while in the worst case scenario it will fall below the threshold of 500 transactions, with a decrease of around 18 percent compared to the previous year . In 2021, transactions will suffer a decrease of an entity slightly less than that of 2020, with a result between 407 and 531 trades, only to then substantially stabilize during 2022".
According to the Nomisma experts, a further element of brake on settlement activity in the real estate sector could be represented by the "rigidity, moreover highlighted in the recent past, with which the owners will react in modifying their own realization expectations".
In fact, this phenomenon «represented an obstacle to the recovery of transactions in the years of the double recessionary wave of 2008-2013, effectively prolonging the negative phase beyond the usual timing of previous real estate cycles. This would involve an all in all limited reduction in prices in the short term, but a more extended period of time within which the contraction of values will take place, with undesirable consequences of postponing recovery times».
Six years back
Comment Luca Dondi dall'Orologio, CEO of Nomisma:
«The effects of the pandemic and the lockdown appear devastating if observed through the forecasts of the number of residential sales. The almost total impossibility of promoting the weeks when business is closed and, above all, the progressive weakening of the country's economic fabric, which can already be understood in many ways, will lead to a dramatic drying up of the real estate market. It will be a double wave: the first fueled by quarantine, forced social distance and the weakening of the sectors immediately exposed to the crisis, with the consequent loss of jobs and a generalized increase in the propensity to save; the second fueled by the inevitable massive decline in aggregate demand, which will lead to a liquidity crisis for companies, especially those most exposed on the domestic market (the majority), which will in turn lead to a further drop in demand».
In short, according to Dondi dall'Orologio it could be on its way:
"A depressive spiral that can only be mitigated by an impressive direct injection of liquidity, together with a plan of public guarantees aimed at preventing banks from cutting credit lines to counter the growth of doubtful loans".
The so-called "Liquidity Decree" launched at the beginning of April 2020 by the government of Giuseppe Conte moves precisely in this direction, with the aim of combining a public guarantee with the disbursement of credit by banks to businesses and all sizes.
However, the press reports repeated cases in which the loans have a lot of difficulty reaching the coffers of those who request them; and exponents of Palazzo Chigi on more than one occasion admit the difficulties.
«The objective – observes the CEO of Nomisma – must be to stabilize the system in order to try to contain the economic-financial consequences of the health emergency. If the objectives appear clear and shared, the same cannot be said about the endowments of resources and operational strategies. However, the drama of the picture imposes immediate actions of extraordinary importance, without anachronistic pretensions to achieve an unattainable Pareto optimum. Indeed, the hesitations and vagueness of the post-lockdown perspective allow for the proliferation and spread of a virus that risks having, on balance, a much higher lethality rate than that of Covid-19. In this scenario, the forecasts for the real estate markets that had shown greater momentum and dynamism before the crisis, such as Milan and Bologna, appear merciless: the severity of the impact of the pandemic and the containment solutions adopted will set the real estate six years".
An increasingly risky investment
There are those who have long called for caution when deciding to invest in the real estate sector. This is the case of Andrea Ragaini, deputy general manager of Banca Generali, who first makes a premise and then two accounts.
«Let's start from the assumption – he observes – that by investment we must understand the acquisition of an asset that produces an income. In the case of a property, the return is given by two components: change in value over time and rental income, the so-called rent. Let's consider a sufficiently long time horizon of the investment, as real estate requires, ie from 1980 to today. Well, in this period, the real average annual return, i.e. net of inflation, and gross of house taxes, in our country was 4,57 per cent, against 9,45 per cent of shares (including dividends), 5,85 per cent of corporate bonds (including coupons) and 2,42 per cent of government bonds (including, where present, coupons).
Ragaini notes again:
«If, on the other hand, we consider the house only from the point of view of a good for use, since there was a codified system at European level for calculating the value of properties, i.e. since 2010, prices in Italy have dropped by 17 per cent, while the European average recorded an increase of 21 per cent».
Salvatore Gaziano, investment director of SoldiExpert SCF, also expresses perplexity about real estate investment:
«The brick, which is the number one investment for Italians, has been gathering gray and black clouds for some time and certainly not only following the outbreak of the pandemic. In Europe we are among the peoples with the highest percentage of families who live in their own home. In the last ten years we have often dealt with the subject with our clients because, as independent financial advisors, it is one of our duties to talk at 360 degrees about how wealth is invested and where it is more correct to direct it. On the subject we have always warned that the era of brick as an "investment" is unfortunately at its sunset. Too many risks, very few benefits. Already in 2015, our analysis highlighted how real estate in Italy, after the 2008 crisis, had recorded a drop in prices in real terms that was among the highest in the world, which did not bode well for the structural and financial changes which our country was going towards».
As Gaziano points out:
«The Italians' falling in love with the house as an investment has sustained and caused prices to rise significantly and often detached from reality. Something that resembles the phenomenon of those savers who in recent years have bought shares of unlisted banks in Italy to discover one day that those same shares were not so easily liquidated and the price at which they had bought the shares was definitely off the market. And the comparison is not as risky as it might seem because for a long time many Italians have considered the purchase of a house not for its use value but as a real investment endowed with peculiar characteristics such as "income and security"».
The real estate market in Italy in recent years, according to Gaziano:
«He was so "drugged" by the purchase by a wide range of savers that they considered the house a sort of perfect investment destined almost only to rise. And this has greatly fueled the second home market in particular. Which is among those who, not by chance, have been most affected by the boom that started after 2008, with even dramatic effects because there are municipalities in Italy where it is no longer possible to sell even a house due to the absence of buyers».
Of course, we also need to make a separate discussion, Gaziano acknowledges
«for the most famous Italian "trophy" locations from a tourist point of view or more lively from a professional and university point of view, with "in" neighborhoods where prices have remained at relatively higher levels - such as the aforementioned Milan -. But it goes without saying that even in these cases the "glocal" and political, social and fiscal contexts must in any case be monitored over time".
And now what will happen post pandemic or PC?
"The scenario - admits Gaziano - has unfortunately worsened and certainly not only for the tricolor brick given that all over the world there are questions about the future of the real estate market".
The lack of maintenance
The reasons for the poor performance and the drop in prices of the Italian real estate sector over the years are many and are independent of the Coronavirus. Starting, underlines Ragaini, with an important factor:
“The supply of homes for sale is more than double the demand. Therefore, as in any market, if supply exceeds demand, prices will hardly rise».
Furthermore:
“The quality of the product is rather poor. Suffice it to say that 74 percent of homes fall into the three worst energy classes, G, F, E, while from 2021, barring extensions, new homes can only be built with almost zero energy consumption, a concept that goes beyond class A. more: 60 percent of residential buildings do not meet "modern" anti-seismic standards, issued since 1970. This means that structurally most of the buildings require substantial maintenance interventions».
Ragaini adds again:
«Less than 2 percent of houses in Italy have insurance coverage against catastrophe risks, which is paradoxical since ours is one of the countries in the world with the greatest seismic, hydrogeological and landslide risk. This has meant that, in the face of earthquakes, torrential rains and other atmospheric phenomena that have occurred over the decades, cracks and rust have formed in the metal frames, even at the foundation level. But without insurance coverage there have been few restoration interventions. Conversely, houses require periodic maintenance, not only ordinary, but also extraordinary. Otherwise they deteriorate and lose value, just like any commodity, such as cars for example».
What are the reasons for this neglect?
«The average annual net income of Italian families - Ragaini replies - is equal to 31.393 euros (source ISTAT) against an average annual expenditure of 30.852 euros, of which 10.828 are invested in the house, which largely corresponds to the mortgage or rent . Therefore, there are not many resources left to make improvements to the "home product"».
But things will inevitably have to change, as the deputy general manager of Banca Generali points out:
«Italy, like any other European country, will have to reduce the production of carbon dioxide by 2050 percent by 80 compared to 1990 and most of the CO2 is produced by buildings. Hence the many tax bonuses recognized by the State for energy efficiency. So the trend will inevitably have to go in this direction».
In short, as Ragaini points out:
«The myth of the house is fading more and more, both in terms of investment and in the sense of security that ownership of a property has always transmitted. A change that is also linked to two other important factors such as job mobility and the low income that characterizes the new generations. Additional elements that lead to a review of the paradigm of buying a house, or investing in real estate, as a central moment in one's life path».
A new company with different habits
On closer inspection, notes Gaziano, even before the Coronavirus, new holiday habits, from low-cost "low-cost" flights to sharing economy phenomena such as Airbnb, had changed the real estate market.
«The economic crisis that will follow the lockdown and the associated fall in GDP - reasons the investment director of SoldiExpert - may not be easy to recover in the short term; after all, we have never recovered from the 2008 crisis. For the new generations, this could mean an increase in expatriates in a demographic framework that was already not oriented in the best way. An increasingly elderly and inactive population with children and grandchildren who find it difficult to find work or who receive low wages or low incomes could increasingly find themselves in the position of "seller" rather than "buyer".
If some trends were already underway in the "before Coronavirus" (BC), Covid-19 has brought new ones with it. For example, when looking for a new home, the presence of a terrace or a courtyard or a garden has taken on a new importance, a legacy of the long months of "quarantine" in which one was forced within the walls of the house without the possibility, if not in rare cases, to go out and get some air.
In April 2020, the Casa.it website recorded a sharp increase in searches for holiday homes with a swimming pool or garden.
From the file on Pandemia and green challenges of our time, created by Green City Network and Foundation for Sustainable Development in partnership with Ecomondo-Key Energy, a different way of looking at homes emerges, post Coronavirus. The pandemic, the dossier highlights,
«he taught the importance of balconies, terraces, courtyards and gardens, including communal gardens, all intermediate spaces in general that can play important roles, also from an environmental point of view, with the green building approach».
An approach that is linked to the construction of eco-sustainable buildings.
«The Coronavirus emergency – continues the dossier in its analysis – has also made us rethink the importance of urban space, an urban structure that ensures proximity of residences to services, work and recreational facilities, so as to reduce travel from one zone to zone of the city and commuting».
Escape from the cities?
There are even those who, starting from similar assumptions, go so far as to prophesy a process of slow de-urbanisation; a sort of escape from the metropolis to go and live in the countryside, as Toto Cutugno sang in 1995, or simply to get away from the chaos and risks of big cities.
The document also explores this issue further Nothing will remain as before - Italy after the Coronavirus: thoughts to understand how our future will change, created by the Gianroberto Casaleggio Association, chaired by Davide Casaleggio, and released in mid-June 2020.
The study, recounting the ten irreversible changes in people's lives after the advent of the Coronavirus, lines up as many points on which, according to the association, action must be taken to relaunch the country.
Well, change number 4 is defined as follows: "Smart mobility: from the public transport crisis to deurbanisation".
«If the crowded realities of urban life, such as mass transport - the document reads in this regard - are particularly sensitive to pandemics, it is plausible that the coming years will see a rediscovery of the suburbs, with a clear de-urbanization of the metropolis. Those who want to escape from a dangerous and virus-ridden city will have many options at their disposal. New technologies make it easier for companies to work away from dense megacities and the added boost from the Coronavirus has made the process even faster, underlining the dangers of crowded urban spaces for both workers and citizens. In the 16s companies were dedicating 11 square meters of floor space per new employee, a number that has dropped to 2000 square meters in the late 4,5s and 2030 square meters today. In XNUMX, there will no longer be room for an employee because that employee will be working from home."
Credit Suisse experts also address the issue of the consequences of the Coronavirus on cities in the document Supertrends. The push for change:
«Heat waves, increasingly frequent due to the effects of climate change, are more intense in large cities, where skyscrapers, cars and paved roads tend to retain the heat. Furthermore, metropolises face extraordinary challenges in managing pandemics, as demonstrated by the Covid-19. Therefore cities need to become smarter to effectively manage urban growth and the resulting difficulties, including the protection of public health. Around the world, planners and residents are using data-driven technologies, such as the Internet of Things and artificial intelligence, to improve traffic flows, design and waste and waste management systems. water resources in "smart cities". However, there are still many hurdles smart cities face, including data fragmentation, data funding and storage, and privacy issues, according to a Scientific American blog. Intelligent transport and mobility solutions can reduce congestion and improve connectivity, as well as stimulate economic growth by ensuring adequate access to cities thanks to the emergence of so-called agglomeration economies.
In France, exemplify by Credit Suisse:
«The “Grand Paris Express” railway project will improve connections between the suburbs and developing districts of Paris and business districts, research centers and airports by 2035. For example, it will take a researcher just 15 minutes, instead of 66, to travel from Orly airport to the Paris Saclay university campus, according to the Grand Paris Express website.
