Rising benchmark interest rates raise tempers, but the problems lie elsewhere: These are the causes of rental housing misery

One can only guess how many tenants will be affected by the new rise in interest rates. According to Raiffeisen, owners of approximately two-thirds of rented apartments have the right to adjust rents.

However, compared to market interest rates, the mortgage reference rate moves very slowly. It is quite slow due to its design.

Within a year, the Central Bank increased the policy rate from minus 0.75 to 1.75, resulting in an overall rise in market interest rates. However, the higher interest rates only apply to newly signed mortgages or those tied to the Saron money market interest rate.

Fixed-rate housing loans granted before the interest rate change will not be affected by the interest rate increase. As a result, all outstanding mortgage interest rates have increased by just 0.5 percentage points since 2021; This is much lower than new mortgage interest rates.

Depending on the term, these rates have increased by 1.5 to 2 percent: banks now charge around 3 percent for ten-year fixed-rate mortgages. At the low point of 2020, deals around 1.25 percent were normal. Since the negative interest rate phase, Saron mortgage loans have become more expensive, from 1 percent to 2.7 percent on average.

But inertia also means that the average interest rate across the mortgage portfolio, and therefore the reference interest rate, remains high for longer, even if interest rates fall slightly again.

However, tenants with long-term tenancies cannot complain. The reference interest rate has fallen eight times since it was introduced in 2008, causing rents to fall.

The main reason for high rents in Switzerland and growing frustration in the rental market is not that the reference interest rate is currently rising.

The problem lies deeper. More precisely, in a rental housing market that is divided into two. Existing tenants make up the majority of the market. These existing tenants are protected by regulations. Your rents may only be adjusted in very rare cases. This happens when inflation rises and the reference interest rate increases. Since interest rates fell continuously between 1995 and 2022 and there was no corresponding inflation (the price level in Switzerland in 2021 was at the same level as in 2008), existing and new rents have become very different from each other.

Everyone who is in the same apartment for a long time has a good laugh. ZKB has done the math: Tenants who moved into a rented flat in the canton of Zurich in 2008 have managed to reduce their rent by 3.3 percent so far. Due to the constantly falling reference interest rate. At the same time, asking rents increased by a third. This is a huge contrast: on the one hand, rapidly increasing rental prices, and on the other hand, current rents remain constantly stable or even falling.

The difference is greatest in Geneva and Zurich. The cost of a newly rented three-room apartment in Geneva is 53 percent more than an existing apartment. In Zurich, the difference is 28 percent. Existing tenants therefore save a lot of money. The average rental household in Zurich saves more than 5,200 francs on rent each year. This means savings of 1.1 billion francs every year in the city of Zurich alone.

Regulation of existing rents has protected many tenants from rising housing costs for many years. And we created false incentives. Anyone living in an existing preferred apartment will not leave it so quickly, even if it no longer meets their needs, because they will have to live with much higher rent demands.

Elderly people often live in very large apartments and families cannot find apartments large enough. This “situation” created by the desire to stay in the same apartment for a long time is known as the lock-in effect. As a result, over time, affordable apartments are no longer occupied by tenants who need them, but by those who were able to get a cheap property long ago.

Not to mention population growth. Since 2000, Switzerland’s population has increased by 23 percent. In the same period, Germany grew by 2.7 percent, the EU by 4.6 percent and Austria by 13.8 percent. Most of the growth comes from immigration. A net total of 80,000 people immigrated to Switzerland last year and there will likely be even more this year. Figures from the Federal Statistical Office show that 80 percent of immigrants come from Europe. The average wage for immigration management employees is 11,430 francs, while the average wage for Swiss management employees is 10,350 francs. So there is a wealthy, highly qualified clientele that comes to Switzerland and needs apartments.

And this is becoming more and more lacking. 42,000 flats are expected to be completed in 2023. Between 2015 and 2018, there were still 54,000 apartments available annually. Objections, hoarding of construction land, almost no new development and high construction costs make construction increasingly difficult. Additionally, per capita space needs have generally increased. More people needing more space in a smaller area means higher prices. The dilemma now needs to be resolved through compression. It is an idea supported by parties from all walks of life. But things look different for affected residents. Objections such as lengthy building permit processes, national security and noise protection also often delay construction projects for years.

At the same time, there are other problems. Obstacles to the development of construction land have increased significantly since the revised Spatial Planning Law came into force. It has not been possible to carry out temporary development in various cantons for years. The number of undeveloped building zones is also decreasing.

Construction land is also being hoarded. This phenomenon is based, among other things, on regulations that actually seek to prevent strong price growth, as Credit Suisse wrote in a recent study. In the early 1990s, a property profits tax was introduced to reduce trading in the property market due to the belief that fewer transactions would limit price growth. The shorter the holding period of the property, the higher the profit tax will be. Since then, prices have continued to rise. At the same time, property owners are now waiting longer to develop their properties because their after-tax returns are higher.

The cantons can indeed provide measures for the mobilization of construction land. These include municipalities’ purchasing rights (e.g. BS, BL, GE, LU, SG) or rezoning (e.g. LU, VD) and levying incentive taxes on undeveloped construction land (e.g. AG, BE). However, in many cantons these tools have not been available to communities for a long time. They also need to be implemented consistently by communities.

Therefore, there are no signs of relief in the rental market any time soon. Reference interest rate or not.