Fitch: Italian Housing Market Yet to See Increase in Demand

In its latest Italian Mortgage Market Index, Fitch Ratings notes that the recent revival of lending activity is yet to lead to growth in Italian housing demand. The agency believes that the housing supply/demand gap will remain relatively high in response to the fragile economy and ongoing competition for low risk loans (eg refinancing, low LTV loans) amongst lenders. These factors are likely to cause further contraction in home prices.

In 4Q14, the Italian mortgage market performance remained unresponsive to the on-going macroeconomic stresses. The volume of late stage arrears was unchanged at 1.6%, while the balance of outstanding defaults increased to 5% from 4.7% in September 2014. Fitch notes that the increase is mainly due to loans originated under more aggressive underwriting standards, as well as mortgages granted to borrowers in southern Italy, in addition to the lengthy recovery timing. We expect more underperformance from borrowers in southern regions, where the recession has been more pronounced.

In 2014, home prices contracted by 1.6% year-on-year (yoy), bringing the current-to-peak levels down to 16%. Fitch notes a deceleration in the pace of home price decline, driven by improved home sales growth (+1.2% yoy) in 2014. Southern regions have seen sharper home price declines, as evidenced by the 27% drop from 2008 peak levels. The agency expects further national home price corrections in 2015, with a trough of 20% (from peak) to be reached in 2016. The deeper recession in the south of the country is expected to cause further home price disparity between regions.

Over the first nine months of 2014, new mortgage origination was up by 7.3% yoy. Most of the new lending activity was refinancing loans (eg subrogations). This increased lending activity is yet to filter down to the residential market. As of 4Q14 prepayments across Italian RMBS reported a marginal increase to 2.4% p.a. from 2.3% p.a in 3Q14. While credit demand for home purchase is slowly ticking-up, Fitch believes that lenders will focus on originating lower risk loans (eg refinancing, low LTV loans).

The volume of loans on payment holidays increased to 2.1% at the end of 2014, while originator intervention remained broadly flat over the last quarter. The new principal payment holiday scheme that the government will launch in 2H15 is expected to have a limited impact on arrears, like past initiatives. The agency believes it may lead to alternative solutions being proposed by the banks, mainly own payment holiday schemes. In the short term, Fitch expects a modest rise in payment holidays.

Fitch's 'Mortgage Market Index - Italy' is part of the agency's quarterly series of index reports. It includes information on the performance of residential mortgages, predominantly from RMBS transactions, but also those held on bank balance sheets. The report sets the housing market against the macroeconomic background and provides commentary on the emerging trends. The report, 'Mortgage Market Index - Italy 1Q15', is available on www.fitchratings.com or by clicking the link above.

The data behind the Mortgage Market Index report is also shown in the RMBS Compare which is an Excel-based tool for displaying the performance of individual transactions against each other and Fitch's benchmark indices. It also includes indicators of the broader mortgage markets, home prices and macro-economic background.