Biggest fall in property prices this millennium among neighbors: Is Germany also dragging down Swiss homeowners?

We can best answer this question by looking at the past. Because real estate markets are subject to cycles. In the field of agronomy, the term pig cycle was coined in 1928. This means that pork prices move in strikingly regular waves, with peaks and valleys alternating. This cycle occurs because many breeders use price signals of meat demand as an opportunity to fatten more pigs. There is erosion of margins and supply is expanding greatly in response to unchanged demand. Many manufacturers are withdrawing from the market, creating excess demand. The cycle begins again.

Germany: Prices increased three to four times

Pig cycles are also experienced in real estate markets due to the long planning and production periods in the construction industry and the effect of interest factors. And cycles in different countries often occur at different times. This means that, as seen in the Germany-Spain comparison, each market is at a different point. While prices increased by 4.5 percent in Spain and 1.8 percent in Italy in the last three quarters, prices decreased rapidly in Northern countries such as Sweden (minus 2.8 percent) or the Netherlands (minus 3.8 percent).

Let’s go back to Germany. Many players here seem to forget that prices hit rock bottom a long time ago. Between 2005 and 2011, the real estate market weakened. In addition to the 2008 financial crisis, disruptions in the banking sector were also effective in this. This trend was not reversed until 2011. But at full speed: by 2022, prices will increase three to four times. The European Central Bank (ECB), which imposed negative interest rates in 2016, was partly to blame.

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Never before has real estate in Germany been financed so cheaply. This attracted the attention of investors from abroad. “It was easy to see that capital that had previously flowed to other countries was now going to Germany,” says Thomas Veraguth, UBS CIO responsible for Swiss and global real estate strategies. “If investors see opportunities, it happens very quickly until they move their money out of one country and invest in another. Especially European investors do not need to expect losses as there is no exchange rate risk in the euro area.

Fix – no infinite downward movement

This means that property prices in Germany have increased much more than in other countries. Before the flash crash in 2022 – due to the ECB’s interest rate hikes. “As a result, the investors’ financing advantage was lost,” says Thomas Veraguth. “They have refocused on undervalued countries in Europe.” This meant that the number of hands changing on the German market fell and the small number of transactions taking place could result in large price reductions.

“This is a correction that is happening now,” says Thomas Veraguth, “not a downward movement towards infinity. The bottom must be reached as soon as possible.” Especially since it is a factor that speaks strongly in its favour. The demand for living space is high in Germany, just like in Switzerland. The offer is very small and at the same time very little is being done. According to the ZIA real estate association, in Germany by 2024 There will be a shortage of more than 600,000 apartments, rising to 720,000 in 2025 and 830,000 in 2027. “It is only a matter of time before the cycle turns and prices are supported by excess demand,” says Thomas Veraguth.

Investors migrated to the environment

But investors moved on. Today you are interested in the environment of Europe. Money is flowing to Spain and Italy, among other places, because property prices there have been falling for almost a decade, while in Germany, the Scandinavian countries or Switzerland prices are still rising. Italy and Spain were affected much more severely by the 2008 financial crisis than other countries.

“There were much more risks, more bankruptcies, banking reforms and so on, which deterred investors from investing in these countries,” explains Thomas Veraguth. It wasn’t until 2015 that real estate markets in these countries hit bottom. Since then, prices have started to rise again in Spain and Italy. But nowhere is it the same size as in Central and Northern Europe.

In the USA, the picture is different. Unlike Germany and Switzerland, prices there rose sharply from 2005 to 2008. When the financial crisis hit in 2008, the American real estate market suffered more severely than any other. There was a strong correction between 2008 and 2012. From then on, prices increased. But not to the same extent as in Germany: “The USA is in the same position today as Germany was two years ago,” says Thomas Veraguth. “The acceleration occurred much later than in Germany.” More precisely, with the corona epidemic. Many households were able to make significant savings during this time thanks to the helicopter money the government used to purchase property.

In addition, many were able to take out or extend their mortgages at the best possible time – with record low interest rates in 2020/2021. This means they lose very little purchasing power when interest rates rise again. “Therefore, there are only a few property owners in the US who can no longer afford to purchase their properties due to rising interest rates,” says Thomas Veraguth. Therefore, a crash in the US real estate market seems unlikely.

Switzerland still on the rise

The situation is different again in Switzerland. While many real estate markets were plunged into a downward cycle due to the financial crisis in 2008, the Swiss real estate market escaped these events relatively unscathed. Or, to put it another way, it has been in an up cycle for over two decades and is still continuing. The last accident was a long time ago, about thirty years ago. This started with the stock market crash in October 1987. To prevent something worse from happening, central banks opened the money floodgates. Given low interest rates, many people who had burned their fingers on stocks were looking for a way out. And I found them in the housing market.

A turbulent price rise followed – until the SNB drastically increased interest rates in 1989. Mortgages now cost 8 percent. As a result, prices have fallen by up to 20 percent in a very short time. A lost decade followed and the economy stagnated for years. Until the trend started to change at the beginning of the millennium, which continues until today. However, the rate is below Germany and the USA. “This is because absolute prices in Switzerland are of course higher when inflation is not taken into account,” says Thomas Veraguth.

So cycles are normal. These are not a new development. Therefore, it is wrong to panic, as is happening now in Germany.