There are plenty of similarities between Italy and California. Both are similar in size and have wonderful wine countries and picturesque coastlines. They also share high taxes, a challenging regulatory landscape, and a growing gap between their richest and poorest residents.
One major difference between Italy and the Golden State is the state of their respective housing markets. We all know that California has one of the most expensive housing markets in the nation. The state’s median single-family home price increased 21 percent over the past three years, hitting $584,460 in April, according to the California Association of Realtors.
When I had the opportunity to visit Italy last month, I was surprised to learn of the severely depressed state of the Italian housing market. Home prices in Italy have dropped by 23 percent over the past decade, according to the EU statistics agency Eurostat. In fact, just 12 months ago, Italy was the only market in the EU where housing prices were still falling.
There are some obvious reasons for this. The Great Recession and subsequent European debt crisis significantly worsened Italy’s already fragile economic situation. The country’s economy is growing again but the rate of growth still lags behind other European countries.
Italy’s housing crisis has created negative rippling effects throughout the economy. In 2014 there were 100,000 fewer construction companies in Italy compared with 2008, a drop of 16 percent, according to the Financial Times. Thousands of real estate and other property-related businesses have folded despite a recent uptick in property sales.
Italy’s property market would likely improve if there were an increase in investment. Property investors accounted for one in five real estate transactions a decade ago, according to the Times.
Instead of overhauling burdensome and complex tax and regulatory structures to make real estate investing more attractive, Italy seems to be doubling down on California-style rules that impose disincentives for current and would-be property investors.
Take, for instance, Italy’s “Airbnb Tax,” which went into effect last May. The law requires property owners to pay a 21 percent tax on short-term rental income. This amount is on top of any potential city taxes. The law’s intended purpose is to combat tax evasion, although it clearly benefits the hotel industry which sees Airbnb as unfair competition.
In addition to discouraging property investment, the tax has other negative side effects. According to the Bruno Leoni Institute, a free-market think tank based in Italy, the law is discouraging the development of Italy’s digital economy by encouraging cash transactions to avoid tax obligations. So rather than preventing tax fraud, the law seems to encourage it.
The law also places significant burdens on Airbnb and other intermediaries by requiring them to comply with complicated legal rules as they collect and remit taxes on behalf of short-term rental hosts.
There is some evidence to suggest that the use of Airbnb affects home prices. An independent study released last year by researchers at USC, UCLA, and the National Bureau of Economic Research found that in the U.S., a 10 percent increase in Airbnb listings leads to a 0.64 percent increase in house prices at at the median owner-occupancy rate zip code.
This is not an insignificant increase, considering home prices in the areas surveyed rose by an average of about 4.8 percent annually.
While an increase in property investment might not solve all of Italy’s housing problems, it would seem that reducing the tax burden on short-term rental owners and streamlining regulations could help contribute to the stabilization of home prices while boosting local economies and encouraging growth and innovation in the digital economy.
In California, where state and local lawmakers continue to grapple with how to regulate Airbnb, it remains to be seen whether there will be a statewide effort to crack down on short-term rental marketplaces.
In the meantime, Airbnb hosts in Los Angeles in San Francisco should look on the bright side: the 14 percent lodging tax is a bargain compared to what their Italian counterparts are required to pay.
Ben Smithwick is Director of Development for the Pacific Research Institute. Prior to joining PRI, he worked at Fox News Channel’s Los Angeles bureau and for the Santa Barbara News-Press.