Real Estate Bubble: Risk Analysis for Milan

The Milan real estate market has shown steady price growth, raising concerns about a possible housing bubble. In recent years, property prices in the city have increased significantly, outpacing income growth and inflation. This situation has drawn attention from analysts, investors, and residents, as excessive price increases could lead to a market downturn. This report provides an in-depth analysis of the factors influencing the real estate market, identifies potential risks, and examines future scenarios for the coming years.
Price Trends in the Real Estate Market
Milan is one of the most expensive cities in Italy in terms of housing prices. In central districts, the cost per square meter ranges from €9,500 to €12,000. In more remote areas, prices are around €3,500–€5,500 per square meter. A decade ago, prices were noticeably lower: in 2015, the cost per square meter in central Milan was approximately €6,500–€8,000. This means that over the past years, real estate prices have increased by more than 50%. Such growth is not in line with inflation and average income trends, indicating potential market overheating.
For comparison, the average salary in Milan has increased by approximately 24% in recent years, while property prices have risen by 60%. This disparity between income and housing costs suggests that homeownership is becoming increasingly unattainable for residents, which is a key sign of a housing bubble.
Key Factors Driving Price Growth
Several factors contribute to rising real estate prices. First, Milan is Italy’s financial and business hub, attracting investments. Corporations and companies continue to expand, increasing demand for office spaces and housing. Additionally, Milan remains an important educational center, attracting students and young professionals who require rental or purchased housing.
Second, foreign investment plays a significant role. In recent years, demand for Milanese real estate from foreign buyers has grown rapidly. According to banking sector data, foreign investments in Milanese real estate reached €4.3 billion in 2023, a 30% increase compared to two years earlier. The influx of foreign capital creates additional pressure on the market, driving property prices higher.
A third crucial factor is the city’s infrastructure development. In recent years, Milan has undertaken numerous major projects, including metro expansion, road modernization, and preparations for the 2026 Olympic Games. These initiatives make the city more attractive for living and business, further fueling housing demand.
The fourth key factor is mortgage affordability. For a long time, mortgage rates in Italy remained low, stimulating housing demand. For example, in 2020, the average mortgage interest rate was around 1.5%. However, by 2023, this figure had risen to 4.2%, already exerting a cooling effect on demand.
Signs of a Housing Bubble
Despite positive economic drivers, several warning signs indicate a potential real estate bubble in Milan. The most significant concern is that housing price growth has far outpaced income growth. In 2024, the average Milanese citizen would need to work for at least 15 years, saving 30% of their salary, to afford a 70-square-meter apartment. A decade ago, this period was several years shorter, highlighting the decline in housing affordability.
Another alarming factor is the increase in speculative transactions. In 2023, approximately 27% of real estate transactions in Milan were investment purchases with no intention of owner occupancy. This means a significant portion of the market operates in favor of investors rather than residents, which could lead to instability if demand declines.
The level of mortgage debt is also a critical concern. In 2023, the total mortgage debt in Milan reached €56 billion, a 40% increase compared to 2017. Rising debt levels increase financial risks, particularly if Italy’s economic conditions deteriorate and borrowers struggle to meet their repayment obligations.
Possible Market Scenarios
One potential scenario is a mild correction in property prices. If interest rates remain high, demand for housing will gradually decline, leading to a 10–15% price drop over several years.
A more pessimistic scenario involves a sharp market downturn of 30–40%, similar to the Spanish real estate collapse during the 2008 financial crisis. If a recession or economic crisis occurs, falling demand and distressed sales could trigger a severe decline in property values.
A third possibility is continued high prices. If interest rates decrease, demand could rise again, maintaining elevated property prices. In this scenario, real estate values in Milan would continue increasing, albeit at a more moderate pace of 5–7% per year.
Impact on the Economy and Residents
Soaring property prices make housing increasingly unaffordable for local residents. Renting a 70-square-meter apartment in central Milan now costs €1,800–€2,500 per month, making it unaffordable for many people, especially young professionals and students.
Another major concern is the potential for a banking crisis. If a significant number of borrowers default on their mortgages, banks could face financial difficulties, potentially leading to broader economic instability.
Possible Measures to Prevent a Crisis
To mitigate housing bubble risks, authorities could take several measures. One option is imposing higher taxes on speculative real estate purchases, discouraging excessive investment activity. Another approach is encouraging the development of affordable housing by offering incentives to developers, increasing housing supply, and reducing market pressure.
Stricter mortgage lending regulations could also help prevent financial instability. By imposing stricter loan requirements, authorities could limit excessive borrowing and reduce the likelihood of defaults.
The Milanese real estate market is showing signs of a potential housing bubble. Despite strong demand, the gap between property prices and income levels, as well as the sharp increase in mortgage debt, pose risks to market stability. The future of the market will depend on Italy’s economic policies and the European Central Bank’s decisions regarding interest rates.