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ITALYassets, and given relatively stable housing prices to date, have protected households fromfluctuations in asset prices during the financial crisis (see Bank of Italy, 2012b).11.Financial wealth is concentrated in less risky assets such as deposits and bonds. Thevalue of Italian households’ financial assets as a ratio to disposable income (3½) has remainedbroadly unchanged during the crisis. Some 92 percent of Italians hold financial assets, somewhatbelow the euro area average (97 percent). The proportion of Italian households holding riskier assetssuch as mutual funds (6 percent) and shares (5 percent) are about half that of the euro area average(11 and 10 percent, respectively). Italian households’ financial portfolios contain a high proportion ofrelatively low-risk assets, partly reflecting an ageing population, such as public and private bonds(15 percent, compared to a 5 percent euro area average), and insurance and pension reserves. Overthe past decades, mostly due to a decline in asset prices, the value of investment in risky assets hasdeclined. Consequently, the share in financial assets of mutual funds and shares has been reducedfrom 47 percent in 2000 to 25 percent in 2012. Ownership of the riskier assets is concentrated inhigh-income households, with holders of mutual funds and shares predominantly belonging to thetwo highest quintiles of the income distribution.12.Low-income and young households have a small and declining share of the wealth,making them more vulnerable to an economic downturn. Low-income and young householdshave been more strongly hit by the decline in income and tight financial conditions during the crisis.The richest 10 percent of households owned 46 percent of net wealth in 2010, up from 44 percentin 2008. The net wealth of low-income households is 7 percent, which is low in a historicalperspective, and young households (with a head younger than 35 years) also hold a historically lowshare of net wealth, at 5 percent.INTERNATIONAL MONETARY FUND7

ITALYFigure 1. Italy: Household Debt and WealthHousehold debt in Italy is low in an internationalperspectiveMortgage financing has expanded, but remains belowlevels in other advanced countries200200Household Debt to Gross Disposable Income, 1998-2012 1/180(In lyFranceEuro 0Consumer credit10010080806060404020200ItalyFranceGermany Euro areaSpainUKSource: ECB, Eurostat.The economic downturn has reduced real disposableincome and savings50Debt-to-income (mean)Debt-to-income (median)Households with debt (rhs)Household Disposable Income and Savings Rate(In percent and index 2007 100)100301002050101090002ndSource: Bank of Italy.3rd4th5thTotalQuintilesHousehold Net Wealth(in percent of disposable income)10008008006006004004002002000-200Savings rate (rhs)80199920012003200520075200920112013The share of riskier assets in financial assets has beenreduced, mostly reflecting declining asset values100Household Financial Assets(In percent of total)10080806060404020200LiabilitiesFinancial assetsReal assetsNet wealth-4000-200-4001998Source: Bank of Italy.8Real disposable incomeSource: ISTAT.High real assets have contributed to a comfortable andstable net wealth position100015401501st120Mortgage60Debt-to-Income Ratio and Indebted Households(In percent, 2010)20012000Debt is less frequent among lower-income households,though their average debt burden is more elevated250140Household Debt to Banks to Gross Disposable Income,2003, 2007 and 2012Other(In percent)2012Source: Eurostat, ISTAT and other national statistics agencies.1/ Household includes households and non-profit institutions serving households3001402008INTERNATIONAL MONETARY FUND201102000Shares and mutual fundsSource: Bank of Italy.2007Bonds2012ReservesDeposits

ITALYB. The Housing Market13.House price inflation in Italy has been in line with the euro area average. Over the lastdecade, Italian housing prices increased on average by 4½ percent a year, about 2 percentagepoints above HICP inflation, consistent with euro area trends (Figure 2). Indices of affordability showthat Italian house prices are somewhat above their long-term average, calculated as the averagesince 1980, though less so than in countries where housing prices appear substantially overvalued.The price-to-rent ratio was 2 percent above its historical average in 2012, while the price-to-incomeratio was 15 percent above. However, a study by the Bank of Italy—based on an econometricanalysis to determine a simultaneous equilibrium on the property market, the mortgage market andthe construction loan market—suggests that housing price developments have been in line withfundamentals over the 25 years estimation period.3 The current discrepancy between actual andequilibrium housing prices is estimated to be less than one percentage point.14.The weak economy and credit tightening have nevertheless translated into sharpdeclines in housing market activity over the past year. High unemployment and declining realincomes coupled with tightened bank lending standards have led to sharp falls in constructioninvestment and depressed house sales to half the peak level recorded in 2006. Housing transactionsstarted falling sharply in early 2012. Transactions declined by an annual rate of 30 percent in 2012Q4, (Figure 2), though recovered to -14 percent in 2013 Q1, and the annual growth rate ofhousehold mortgages turned negative in the beginning of 2013. The average time to sale hasreached more than 8 months. The majority of responding real estate agents in the April 2013Housing Market Survey (Bank of Italy, 2013a) believes that the real estate tax put into effect in 2012have contributed to weak activity and price declines.15.Weak housing market activity and confidence have in turn exerted downward pressureon prices. The Housing Market Survey shows that the number of transactions is being depressed bya large price gap between sellers and buyers. The discount-to-ask price for sold houses reached16 percent in 2013 Q1 (Figure 2). The official house price indices from ISTAT and the Bank of Italyshow that housing prices have fallen by almost 7 percent since their peak in 2011. The price fall islarger for existing houses than new houses, for which prices just started falling in 2012 Q3. Priceindices from private sources show a larger price decrease, but have less comprehensive coverageand do not capture the quality adjustment embedded in the official price index. In the next fewyears, continued weak activity and tight lending conditions are likely to put further downwardpressure on prices. In this vein, most real estate agents surveyed by the Bank of Italy expect prices tocontinue to fall in the next two years.3See Nobili and Zollino (2012).INTERNATIONAL MONETARY FUND9

ITALYFigure 2. Italy: The Housing MarketHouse prices in Italy have increased broadly in line withthe euro area average260Housing Prices(Index, 2000 100)240ItalyFranceGermanySpainEuro areaUK220200180160House prices relative to income are somewhat above longterm averages, but less so than in some 010080802000200220042006200820102012Italy: House Transactions and Real House Price(Index, 2000 100)United 1999200120032005200720092011The discrepancy of official price indices with privatesources reflects quality adjustment and a larger sample300House Price Indices(Index, 1990 100)250100100Transactions80Real price60602012Real estate agents expect prices to continue to decline inthe short urce: Agenzia del Territorio, Bank of Italy, and ISTAT.140Ireland13030012080150ItalySource: OECD.Transactions have fallen by almost 50 percent since theirpeak in 2006, but the price adjustment has been limited140160(Index, long-term average 100)United States1997Source: ECB, Halifax and Nationwide Building Society.170House Price-to-Income RatiosExpected Housing Prices Change 1/-10Bank of 82011Source: Bank of Italy/ISTAT and Nomisma.A large price gap between sellers’ and buyers’ prices is oneof the reasons for an increasing average time to sale189Price Discount and Sale Time16Time to sale (rhs, months)-208Discount-to-ask price 09201020112012Source: Bank of Italy.1/ Balance of real estate agents' opinion indicating increase ordecrease in prices in the current quarter.10INTERNATIONAL MONETARY FUND8620082009Source: Bank of Italy.201020112012

ITALYC. Financial Linkages16.Bank credit to households has tightened since the onset of the crisis. Prior to the crisis,during 2005–07, household debt granted by banks grew at an annual pace of more than 10 percent.The growth slowed rapidly to 3 percent during 2008–09 and turned negative in late 2012, reaching-1 percent in May 2013. The deceleration in 2012 affected all categories of loans, though mortgageswere particularly impacted, as new mortgages granted in 2012 roughly halved compared to 2011.4New consumer loans fell somewhat less, by 14 percent. The Bank Lending Survey (Bank ofItaly, 2013b) shows that both tighter credit standards by banks and lower loan demand byhouseholds have contributed to the decline in credit. Currently, lower loan demand appears to bethe predominant factor, with households being affected by weak consumer confidence, lowerconsumption and negative housing market prospects. Banks’ tight credit standards are explained bynegative prospects of the economy and the housing market for mortgages, and increasing concernsabout the credit worthiness of households for consumer credit.17.Households’ relatively strong balance sheets have mitigated the impact of the crisis onbanks’ asset quality.5 The stock of bad debt was 6 percent of total household debt in June 2013, ofwhich about 65 percent is secured with real assets (Figure 3). Default rates, given by the ratio of newbad loans to total performing loans at the beginning of the period, have been stable at 1¼ percentover 2010–13, relative to about ¾ percent in the pre-crisis years. But more leading indicators suchas past due and doubtful loans have recently seen increases, pointing to a possible furtherdeterioration in household credit quality. Past due household loans increased to 1.2 percent in June2013, compared to 0.9 percent in December 2011, and doubtful household loans increased to2.6 percent from 2.1 percent over the same period.6 For both past due and doubtful loans, theincreases have been mainly for consumer credit and other loans (comprising overdrafts andmortgages other than those used to purchase primary residences).18.Loan-to-value (LTV) ratios for mortgages are prudent, and have decreased for newmortgages. The low LTV ratios are, in part, a result of strict housing credit regulations and prudentbank practices. According to the Housing Market Survey, LTV ratios on new mortgages have declinedfrom 69 percent at end-2008 to 56 percent in early 2013 (Figure 3). The average length of newmortgage loans has remained broadly constant at 22 years over this period. For outstandingmortgages, about two thirds had LTV ratios of between 50 to 80 percent, and only 8 percent hadLTV ratios above 80 percent in September 2012. The LTV ratios for first-time home buyers in Italy areat the lower range of those in euro area countries. The Bank of Italy estimates that the share ofmortgages in negative equity is near zero.4The reduction in new mortgages is partly due to a drop in mortgage substitution and subrogation, as interest rateson new mortgages became less favorable.5The loan classification rules and supervisory practices are more conservative in Italy than elsewhere in Europe,making comparison of NPL figures across countries potentially misleading.6The increase in past due loans is partly explained by the expiration of exceptions that allowed banks to wait toclassify loans as past due until they had been in arrears for 180 days. Now that the exceptions have expired, loansthat have been in arrears for 90 days are classified as past due.INTERNATIONAL MONETARY FUND11

ITALY19.Default rates on mortgages are low, more so for younger vintages. Stricter selectioncriteria and lower LTV ratios for mortgage loans have translated into a pronounced decline indefault rates on mortgage loans concluded during 2009–11, compared to those granted in the threeprevious years.20.A low share of mortgages and variable interest rates limit further the balance sheetrisk for banks. Outstanding mortgage lending amounted to EUR 365 billion at end-December 2012,accounting for some 15 percent of total bank credit. Most mortgages––about 70 percent––havevariable rates typically linked to the three-month Euribor, though of these, 10 percent have a cap onthe interest rate. The reduction in Euribor rates following the 2008 financial crisis reduced the debtburden of indebted households. However, as part of the tightened credit conditions, lenders haveincreased the spread over Euribor on new mortgages, to about 3½ percentage points, against anaverage of 1 percent in the pre-crisis years.10090Typical Loan-to-Value for a First-TimeHome 06200520040.520090.520100.0Yr disb.Source: Bank of Italy.1.58020112.0New Mortgage Loans in Default,by Year of Disbursement(in percent of number of contracts)2011 1 yr 2 yrs 3 yrs 4 yrs 5 yrs 6 yrs 7 yrs0.0 8 yrsSource: Bank of Italy.21.Mortgage substitution and subrogation are commonly used to enhance the financingterms. A 2007 reform liberalized the mortgage market, including through the elimination of prepayment penalties, effectively increasing the mobility of mortgage customers. Mortgagesubstitution, where a borrower renegotiates the contract (with the same bank or a new bank) toobtain better financing conditions, possibly also amending the amount of the loan, or mortgagesubrogation, where borrower ends the contract and start a new contract (with the same or anotherbank) to obtain better financing conditions, have been common in past years when interest rateswere low and falling. However, with worsening financing terms on new mortgages in 2011–12,mortgage substitutions and subrogations are now less attractive. Mortgage substitutions andsubrogations amounted to about 12 percent of new mortgages in 2011, down from 20 percentin 2009 and 16 percent in 2010, and are expected to have decreased further in 2012. Renegotiationswith the same banks were done for 7½ percent of mortgages in 2008, 3 percent in 2009 and1–2 percent in 2010–11. The number of debt restructurings, where the bank incurs a loss, is verylimited (less than 0.1 percent of loans in December 2012).22.Banks and the government have adopted measures to protect low-income anddistressed borrowers during the crisis. Under the initiative of the Italian Banking Association andthe main consumer organizations, a moratorium on mortgages was implemented in February 2010,with wide participation from banks (Box 1). The moratorium expired in March 2013, and has enabled12INTERNATIONAL MONETARY FUND

ITALYaround 100,000 homeowners to suspend repayments. Since banks do not incur a loss, mortgageunder the moratorium are not classified as “restructured” and are not considered part of impairedloans. About 70 percent of those benefiting from the moratorium have resumed regular paymentsat the end of the suspension, suggesting that the measure has improved the creditworthiness of theparticipating households (see Bartiloro, Carpinelli, Finaldi Russo and Pastorelli, 2012, and Bank ofItaly, 2012c). The government’s Solidarity Fund (Box 1) is targeted at low-income households andcontributes to interest payments on mortgage loans for first-time home buyers during paymentsuspensions. The capital endowment of EUR 20 million for 2011 was quickly exhausted, andcontributed to the interest payments of 5,000 households. A further EUR 20 million have beenallocated for 2012–2013.23.Mortgage loans are full recourse under Italian law, offering considerable protection tocreditors. As in other countries in continental Europe, borrowers in Italy must repay their debt infull, regardless of any change in the value of the property, and a creditor can in some cases attachother (present and future) assets of the debtor.24.The recent law on personal bankruptcy provides support for house

This Technical Note on the Financial Situation of Italian Households and Non-Financial . Monetary and Capital Markets Department This Technical Note was prepared by IMF staff in the context of the Financial Sector Assessment Program in Country. It contains technical analysis and detailed information underpinning the FSAP's findings and