Despite the stable Swiss market: what could trigger unwanted property sales in Switzerland?

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Rising interest rates and the unstable economic situation in the second quarter affected the Swiss real estate market. As the real estate portal Realadvisor announced last week, prices of flats and houses fell. This is not surprising given that higher interest rates often mean lower valuations. Rather, the real question is how big the devaluation pressure will ultimately be.

For example, a sudden increase in mortgage interest rates may trigger a shock that will strain financial sustainability and lead to significant price corrections in the housing market. Burak Er, Head of Research at real estate and mortgage service provider Avobis, tells cash.ch. As early as 2022, more than a third of the mortgages issued were not financially viable, assuming the mortgage interest rate was between 3 and 4 percent. Data from the Swiss National Bank (SNB) on the loan-to-value ratio and affordability of new mortgage loans are not exactly optimistic.

It shows that new mortgages are often associated with lower loan-to-value ratios, but also lower affordability, which is characterized by higher debt-to-income ratios. “Assuming the interest rate is 4 to 5 percent, that would apply to more than half of all new mortgage loans,” Er says.

Therefore, an unexpected increase in the interest rate cycle that will raise the entire yield curve can have devastating consequences. The calculated precedent can use the affordability buffer and therefore jeopardize the creditworthiness of many mortgage holders. Such a default development would increase pressure on property owners to sell their residential property as soon as possible, as the costs would no longer be financially viable.

This development will cause excess supply in the market and therefore a negative price development. A sudden economic downturn that causes a drop in demand will have the same effect on prices. “I currently consider the probability of such a development to be quite low due to the inflationary trend,” He says.

Detached houses and apartments are overrated

Figures from the SNB’s Financial Stability Report for June suggest there is still a risk of a price correction. Between 15 and 40 percent of single-family homes and apartments are overvalued. There was talk of overvaluation of 10 to 35 percent a year ago.

However, as the Central Bank writes, there is great uncertainty about the appropriate level of valuation. All supply and demand factors affecting the short and medium term balance in the residential real estate market have not been fully recorded. For example, the supply is scarce and the number of households is growing even faster than the population. Accordingly, price reductions may be soft and without any appreciable nominal adjustments, given favorable inflation rates.

“Since the rise in interest rates last year, there has already been a major interest rate shock that has led to a general recession in residential property prices,” adds He from real estate and mortgage service provider Avobis. In an international comparison, some price drops can already be seen, but only very partially in Switzerland. This shows the robustness of the Swiss real estate market.

Key indicators such as construction activity, economic growth, vacancies, immigration and unemployment rate support the resilience of the Swiss market, pointing to limited supply and high demand in the medium and long term. Also, the supply of residential real estate is significantly less elastic than demand, meaning that supply and demand are rarely in balance.

Rising cost of living and higher mortgage costs weighing on disposable income may reduce demand, but these effects also have a negative impact on construction activities, thereby reducing supply. Even if demand falls, it is significantly higher than supply. This eliminates the possibility of a sudden price drop for the Er if there is a real deviation from the fundamental value.

Source :Blick