Reference interest rate rises for first time in 15 years: now there are high rent increases

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In Switzerland, the green light was given for a sharp increase in rents. The reference interest rate will be increased from 1.25% to 1.5%, the Federal Housing Office (BWO) reported today. According to the BWO, this is the first time since the hypo-reference rate for rent was introduced 15 years ago.

Until now, tenants have been able to ignore rising mortgage interest rates. After all, they were not affected by it for long. As a reminder: The reference interest rate serves as a guide for structuring the lease. The fact that this is being adjusted upwards means that rents will increase with some delay. Concretely, it means that landlords can now charge three percent higher rent for existing leases from the next termination date.

Housing costs rise from October

For many household budgets, especially families, this is a hefty sum given current inflation. “From October on, many tenants will likely pay higher net rents,” says Ursina Kubli, 43, senior real estate specialist at Zürcher Kantonalbank. Tenants all over Switzerland are affected, but not all. Because: Landlords can only increase the rent if the current lease is based on a 1.25% reference interest rate. Therefore, it may be useful to take a look at the rental agreement.

“About half of the leases are based on the current mortgage reference rate,” says Robert Weinert, 44, real estate specialist at Wüest Partner. In the Zurich region and central and eastern Switzerland, this share is over 60 percent. “In these regions, the increase in the reference rate will therefore be more pronounced,” Weinert says.

In French-speaking Switzerland – particularly in the Lake Geneva region – the impact is slightly less, as two-thirds of the contracts here are based on a higher reference interest rate. These rents should not be suddenly overturned.

Homeowners will take action

The possibility of rent increase does not differ only by region. There are other criteria that support the price increase. According to ZKB, corporate landlords have tended to lower rents in the past. “So if you have a corporate host, you should expect an increase,” Kubli says. Institutional investors include Swiss Life, Wincasa and Livit.

Experts also assume that most homeowners will push for the increase. “Given the low vacancy rates and rising rents, I assume many homeowners will be active in the near future,” Kubli says.

Frequent movers pay the most

The increase will primarily affect single-person and single-parent households and single seniors. “These tenants already spend a large portion of their disposable income on housing costs,” Weinert says. Every increase in costs causes damage.

Tenants, who have been benefiting from the rent reductions made due to the reference interest rate in recent years, should not be upset about the increase. The situation is different for newly moved rental households. “You’ve found significantly higher market rents in recent years,” says Kubli. The percentage of housing expenses is already high in the lower income brackets, so reference rate adjustments are more important to them.

More rate hikes imminent

And this top-notch move is just the beginning. Because after the first reference interest rate increase, others may come. According to Credit Suisse, there are many indications that a further increase to 1.75 percent could be seen as early as December.

With inflation, some of which may also be reflected in tenants, the two increases will result in an average increase in rents of up to 7 percent through April 2024. Tenants who have enjoyed all reductions in the reference interest rate in the past should even expect rent increases of up to 10 percent for the next year.

Up to 15% increase in rents

“We expect another rate hike in 2024,” said Kubli from ZKB. According to the real estate expert, with today’s interest rate expectations in the financial markets, a total of five more rate hikes could come by 2027.

“An increase in the reference interest rate alone means there is good potential for rent growth of 15 percent,” Kubli says. If you are currently paying CHF 1,500 per month for a 2-bedroom apartment, in five years you will have to pay CHF 1,725 ​​per month. This corresponds to an additional cost of CHF 2,700 per year.

In other words, most renting households cannot avoid spending more of their monthly income for living, if possible.

++Update follows++

Source :Blick