Housing prices in Switzerland may also fall

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This is a widely spoken scenario: rising interest rates will also put pressure on housing prices in the Swiss property market. Examples of this dismal forecast are Sweden, Great Britain or Germany, where corrections of up to 15 percent are a reality. The Swiss National Bank (SNB) increased the interest rate by 0.5 percentage points to 1 percent for the last time in mid-December. And the SNB will likely announce its next rate hike in less than three weeks.

However, there is no real trend reversal in the Swiss property market. Condominium and detached house prices also increased in the fourth quarter, albeit very moderately. This is despite the sharp increase in financing costs. The interest rate index for residential properties on the Hypotheke.ch comparison portal rose by 121 basis points to 2.56 percent in one year. With a CHF 800,000 mortgage, the costs are higher at CHF 800 per month.

Overseas affected more than Switzerland

There are good reasons for this positive development on the price front for Swiss homeowners: «The change in interest rates abroad is much greater than in Switzerland. We have not yet fully experienced the pain of climbing. A Swiss home owner can easily cope with current interest rates,” Claudio Saputelli, Head of Real Estate and CIO Global Wealth Management at UBS, told cash.ch. Burak Er, Head of Research at real estate and mortgage service provider Avobis, said: “There is currently no significant impact on financial affordability at the time of lending, as the underlying affordability calculation has not changed.”

Therefore, interest rates played only an indirect role in home ownership prices. One way or another, the reason for this good starting position for interest rates is inflation in Switzerland, which, unlike other countries, has not risen above 10 percent. Although inflation reached 3.3 percent in January due to the increase in energy prices, Saputelli assumes that values ​​in the 2 percent range will be reached again within the year. Therefore, the SNB will have to intervene less in the future and not raise interest rates as much as before. But interest rates only tell half the story of why the Swiss property market is doing so well.

Very little construction activity in Switzerland

“While Switzerland is facing an incredible supply shortage, we are also experiencing strong population growth,” says UBS real estate expert Saputelli. Despite the population growth, the contraction in construction activity for four years supports the price structure. In terms of supply, rising interest rates are actually a hindrance, as investors have recently found alternatives in bonds as well. The increase in official requirements and the sharp increase in construction costs over the last three years are the most important reasons for the current low level of construction activity. Basically, Swiss real estate as an investment is still a good thing, Saputelli says.

Immigration should also remain high as the Swiss economy is strong and supports demand. In 2022, while internal migration increased by 2.1 percent, the unemployment rate decreased to unprecedented levels. “We’re doing well, so we don’t need to be afraid of any corrections,” Saputelli predicts.

A sharp increase in interest rates and correction in case of economic crisis

So isn’t there more than a 15 percent correction in Switzerland as Swedish property owners are now experiencing it first hand? “In addition to more attractive alternative investment options, serious macroeconomic shocks will have to come before property prices come under pressure from all sides,” says Er, Avobis real estate market expert. These shocks included another cycle of interest rate hikes, a significant economic downturn, or a structural drop in immigration.

“It should hurt us. what hurts us If interest rates continue to rise significantly and we find ourselves in a real economic crisis, »this is the prediction of UBS expert Saputelli. In such a scenario, demand will fall because, for example, immigration will be less strong.

Peter Ilg, Professor at the Swiss Real Estate Institute in HWZ Zurich, said in an interview with cash in early February that only an extreme event in Switzerland can lead to a real estate accident. Otherwise, demand remains strong thanks to the financial strength of “Mami-Papi-Bank” and supports the real estate market in the long run.

Therefore, the current situation in the real estate market cannot be compared with the great Swiss crash of the 1990s. At that time, banks had to write over 42 billion Swiss francs. Regional banks that focus on mortgage lending have been particularly hard hit. In October 1991, Spar + Leihkasse Thun went bankrupt due to excessive debt. At that time, property in Switzerland lost 30 to 40 percent of its value despite strong regional differences.

slowdown in price growth

Saputelli does not see a correction in the real estate market as a scenario due to strong fundamentals. “We expect more of a 1 percent slowdown and price increase in 2023. We are still benefiting from the Corona party.” Against the background of the epidemic, prices in Switzerland rose by an average of 5 to 6 percent as people searched for homes.

“However, on average, a stagnation of prices and a sideways movement can be expected. “The price increases caused by falling interest rates will not happen again, as they have in recent years.” However, it is important to closely monitor regulatory developments and market trends. For example, a property that is “not fit for renovation” may lose value according to federal climate targets.

Accordingly, the price development will be wide-ranging and will vary according to the type of real estate.

And that leaves the specter of having to pay extra for apocalyptic prophets. As a reminder, if the value of real estate drops drastically or income and asset conditions change, borrowers have to fill the vacancy at the bank. Anyone who takes out an 800,000-franc mortgage on a one-million-franc property must add 80,000 francs to meet the maximum allowable loan-to-value ratio of 80 percent if the value decreases by 10 percent. With a 35 percent correction, it would be 280,000 francs.

This article was originally published on cash.ch on February 27, 2023.

Source :Blick