{"id":10898,"date":"2025-11-21T11:52:41","date_gmt":"2025-11-21T10:52:41","guid":{"rendered":"https:\/\/www.rivistaeco.com\/?p=10898"},"modified":"2025-11-21T11:52:41","modified_gmt":"2025-11-21T10:52:41","slug":"what-determines-the-price-of-homes","status":"publish","type":"post","link":"https:\/\/www.rivistaeco.com\/en\/2025\/11\/21\/what-determines-the-price-of-homes\/","title":{"rendered":"What Determines the Price of Homes"},"content":{"rendered":"

How is the price of a home formed? This is no small question in a country where about 80% of citizens live in an owner-occupied dwelling. Housing values are influenced by the fact that few homes are available on the market while demand is strong\u2014especially in major cities and in certain neighborhoods. The quality of local services and the safety of the area matter just as much as the structural characteristics of the property. Then there are urban-regeneration processes and the growth of tourist flows, which have caused an explosion in short-term rentals. The state of the economy, income levels, interest rates, credit availability, and inflation also play decisive roles. In short, the price of housing is a kaleidoscope reflecting economic, social, and environmental dynamics. And it tells the story of how cities change over time.<\/em><\/p>\n

 <\/p>\n

Buying a home is one of the most significant steps in a person\u2019s life. It is not only a personal and emotional decision or a symbolic milestone but also a substantial financial commitment, often absorbing savings built over years of work and potentially binding one\u2019s future, especially if a mortgage is involved. In Italy, the issue is particularly relevant because nearly 80% of the population lives in an owner-occupied dwelling.<\/p>\n

Few Homes on the Market<\/strong><\/h3>\n

But what exactly determines the price of homes? The answer is not simple, because behind every square meter lie economic and social factors. Economic studies have produced an extensive literature following different approaches and perspectives. In general, two broad groups of determining factors are distinguished: those related to demand and those related to supply. The market price is in fact an \u201cequilibrium\u201d price\u2014the point where demand and supply for homes meet.<\/p>\n

Housing supply is essentially rigid, meaning it changes very slowly and is chronically insufficient relative to demand. A recent report from the Cresme research center estimates that between 2018 and 2023 Italy fell short by about 250,000 housing units compared to needs.<\/p>\n

The construction of new residential buildings proceeds especially slowly in already densely populated cities and is entirely absent in urban areas that have reached a saturation point in terms of land use, making it impossible to build new homes. The result? The market largely consists of buying what already exists, and scarce supply pushes prices upward.<\/p>\n

Opposing weak supply, demand in certain contexts is particularly strong. This is particularly true in large cities such as Milan and Rome, which attract those who work, study, invest, visit, or participate in cultural, political, or institutional life.<\/p>\n

Tell Me Where You Live and I\u2019ll Tell You What Income You Have<\/strong><\/h3>\n

The many opportunities offered by big cities generate above-average demand for housing, but not uniformly across the urban area. In fact, prices per square meter vary from neighborhood to neighborhood. Some areas are more sought after because they offer better public transport, high-quality schools, parks, retail shops, and other useful services for residents. They are also generally safer.<\/p>\n

Part of the economic literature argues\u2014and proves with data\u2014that people sort themselves across neighborhoods according to their income capacity: the wealthiest tend to live in the best areas, while lower-income households tend to locate in more modest, often peripheral areas with fewer services.<\/p>\n

Even today, the structure of many Italian municipalities is monocentric: a central urban area equipped with all services\u2014and often with historic and architectural beauty\u2014surrounded by a more modest peripheral belt with fewer amenities, where the most vulnerable population groups tend to concentrate.<\/p>\n

Urban structure corresponds to a social and housing structure, because people generally choose to live in a neighborhood consistent with their economic resources. Of course, this is not an inescapable rule. First, not all Italian municipalities are strictly monocentric. For example, the \u201cBosco Verticale\u201d complex is not located in Milan\u2019s historic center but revolutionized the Isola district, which owes its name to being cut off from the center by railway lines. Until a couple of decades ago, it was a relatively nondescript area\u2014indeed, some perceived it as degraded or unsafe. The change came with the Vertical Forest together with the Porta Nuova urban-regeneration project, which transformed the district by building high-end residential buildings, offices, infrastructure, green spaces. Bars, restaurants, and shops followed. A true process of gentrification took hold, pushing prices per square meter from just over \u20ac3,000 in 2010 to nearly \u20ac9,000 in 2024 (Real Estate Market Observatory data). In this case, the rigid monocentric structure gave way to a polycentric vision in which areas outside the historical center also become centers of attraction that fuel housing demand. Likewise in Milan, the CityLife district\u2014with its three skyscrapers and residential complexes designed by Zaha Hadid and Daniel Libeskind\u2014has boosted the entire surrounding area.<\/p>\n

There is also another reason why people do not always live in neighborhoods that reflect their economic potential: personal choices. A relatively wealthy person may choose to live in a peripheral neighborhood with few services in order to buy a larger or higher-quality home than they could afford in a more central district. Conversely, a person of limited means might choose to live in a street-level studio with no balcony just to reside in a prestigious or central neighborhood, because they value the location and services more than the size or finishes of the property.<\/p>\n

Naturally, intrinsic dwelling characteristics contribute to determining price. Size, floor level, building age, presence of an elevator or balconies have always mattered\u2014along with additional features tied to context or the historical moment. For example, in particularly congested and polluted cities, homes located in quiet areas, perhaps overlooking well-kept green spaces, are highly valued and command higher prices. Parking availability can also make a significant difference, especially in central areas or those with limited parking. In recent years, energy performance has become an increasingly important criterion: energy-efficient homes are in higher demand than in the past, leading to higher prices.<\/p>\n

Prices Are Not Rising Only in Milan<\/strong><\/h3>\n

One might say \u201cMilan is Milan,\u201d an exception compared to the rest of Italy. So let\u2019s take another emblematic case: Piazza del Campo in Siena, one of the most famous and visited squares in Italy. According to the municipality of Siena, the city receives 2\u20133 million visitors per year, and the same municipality has recorded a doubling in the number of dwellings rented for tourist purposes between 2019 and 2023. But this is not the only case: significant increases have occurred in Florence, Venice, Rome, Milan, Naples, and Turin.<\/p>\n

The spread of short-term rentals has several consequences on the housing market. First, homes rented for tourist purposes reduce supply in the traditional residential market. This effect is particularly evident in historic centers or tourist neighborhoods and contributes to raising housing values.<\/p>\n

Second, housing prices rise due to speculative activity by investors who purchase properties anticipating income from short-term rentals. This effect is naturally stronger in tourist centers and in cities with highly competitive housing markets\u2014such as Venice, Florence, and Siena\u2014and much weaker where residential supply is abundant and tourism limited.<\/p>\n

We must not forget broader factors: the state of the economy, mortgage interest rates, credit availability, inflation, average income levels, and tax policies all directly influence home prices by determining how much buyers can afford to spend, the real cost of financing, and more generally the dynamics of residential demand.<\/p>\n

Which factor, then, is the most important in determining market prices? For example, does having an elevator matter more than living near a metro station? The answer comes from statistical models that consider both intrinsic characteristics of homes and the urban, environmental, and social factors that characterize the area in which the dwelling is located.<\/p>\n

In summary, the price of a home reflects the history of the neighborhood in which it is located, the characteristics of the urban context, the availability and quality of services, and the social and demographic composition of residents. Moreover, housing price dynamics also tell the story of ongoing economic and cultural transformations, infrastructure development, tourist or commercial attractiveness, and more generally the way cities evolve and reinvent themselves over time.<\/p>\n

 <\/p>\n

Alessandra Michelangeli is Associate Professor of Economics at the University of Milan\u2013Bicocca. Her current research focuses primarily on the analysis of the housing market, social mobility, and various forms of inequality among individuals.<\/em><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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