| Ramzi Chamat
The Swiss real estate market is a constantly evolving field, often influenced by complex economic and financial factors. Recently, it has garnered increased attention due to its unexpected behavior in the face of rising interest rates. While one might have expected property prices to decline due to higher financing costs, the reality has proven to be different. This article delves into the intricate mechanisms underlying this surprising situation and explores the reasons why property prices in Switzerland are not following the expected trend. We will examine low vacancy rates, a shortage of new construction, the evolving dynamics of renting versus buying, long-term considerations for property owners, and the impact of emotional factors on the Swiss real estate market. Let's delve into this more than surprising real estate market and attempt to understand the forces shaping it.
In a rather unexpected turn of events, the Swiss real estate market has defied conventional wisdom. Despite the increase in interest rates by the Swiss National Bank (SNB), one might have expected a decline in property prices due to higher financing costs. However, reality paints a different picture. Between the summer of 2022 and 2023, prices of condominiums (PPE) rose by 3.4%, and those of single-family homes increased by 1.2%. This article delves into the intricate mechanisms underpinning this surprising situation and explores why property prices in Switzerland are not following the anticipated trend. We will examine low vacancy rates, a shortage of new construction, the evolving dynamics of rental versus purchase rates, long-term considerations for property owners, and the impact of emotional factors on the Swiss real estate market. Let's dive into this more than astonishing real estate market and attempt to comprehend the forces shaping it.
Two primary reasons contribute to this counterintuitive price trend. Firstly, residential vacancy rates remain remarkably low. For example, in June, they were 0.98% in the Canton of Vaud and 0.45% in the city of Bern. Secondly, there is a shortage of new constructions, especially in highly sought-after locations. Over the past few months, Switzerland issued permits for nearly 10,000 constructions, with almost 6,000 being single-family homes. Consequently, the limited real estate entering the market is quickly purchased, further bolstering prices. Additionally, the rise in interest rates has led to increased rents, mitigating potential downward pressure on property prices.
To better understand this phenomenon, it is crucial to recognize that the increase in interest rates has raised the benchmark rate for lease contracts. Calculated based on all mortgages in Switzerland, this rate has been at 1.5% since June 1st, representing a 0.25% increase. Furthermore, since rents are influenced by inflation, it is highly likely that rent hikes will persist.
Although property owners have the option to raise rents, caution is necessary as exorbitant rents could deter potential tenants. High rents for properties built in recent years may remain vacant, allowing supply and demand to dictate rental prices. The situation might change if property prices decrease or if real estate developers are willing to trim their profit margins.
Another unusual aspect of the Swiss real estate market is that it is currently more financially advantageous to be a tenant than an owner. Taking into account mortgage costs, property maintenance fees, financing expenses, and equity returns, renting a 100-square-meter apartment is more cost-effective than buying one. This stands in stark contrast to previous years when extremely low mortgage rates made owning property more appealing. This trend is likely to persist unless interest rates undergo a significant drop.
Comparing the immediate costs of owning versus renting only provides part of the equation. In the long run, property owners typically benefit from the appreciation of their assets. In Switzerland, it is said that residential real estate doubles in value every 30 years. However, this situation changes somewhat in the investment property sector. As many properties for sale struggle to find buyers, prices tend to stabilize moderately.
In this market, calculations revolve around returns rather than selling prices. Sellers often hope to secure prices that buyers are hesitant to pay, especially with the rise in interest rates. No one wishes to pay a 3% interest rate, for instance, to receive a gross return of 3%. Factoring in expenses, taxes, and other costs would result in an even lower net return.
It is estimated that real estate transactions in Switzerland have decreased by 20 to 25% compared to the average of the past two years. As a result, supply now surpasses demand in the market. However, this surplus supply has surprisingly not led to a significant price decrease. This can be attributed to the fact that financial considerations are not the sole factors influencing the decision to invest or abstain from real estate investments. Emotional factors, such as the desire to become a property owner, can play a crucial role in this long-term bet on the future.
The resilience of the Swiss real estate market against rising interest rates and economic factors is a complex phenomenon. Low vacancy rates, limited construction, and the intricate interplay between interest rates and rental costs have all contributed to this unexpected trend. Furthermore, financial dynamics have changed, making renting more profitable than ownership, at least for now. However, the long-term benefits of property ownership should not be overlooked. Ultimately, the Swiss real estate market is a unique landscape where both financial and emotional factors shape investment decisions, and these dynamics are likely to continue influencing the market in the foreseeable future.