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Home purchases by real estate investors in the US fell 48.6 percent in the first quarter compared to the previous year. According to financial news outlet Markets Insider, this is the biggest annual drop since real estate broker Redfin began tracking records in 2000.
The pullback from this group outpaced the market’s overall 40.7 percent decline in purchases as rising interest rates and falling rents and property values hurt profitability. The downward trend could continue into the second quarter as borrowing becomes more expensive for investors. Redfin predicts that lingering economic uncertainty may prompt some investors to switch to other asset classes, such as stocks and bonds.
Tough situation in the US real estate market
“The US housing market is experiencing significant stress at the moment. “Significant price increases (sometimes over 50 percent) during the Covid pandemic, combined with an uncertain economic environment and massively rising mortgage rates, indicate an imminent market correction,” said Burak Er, Head of Research at Avobis, when asked by cash.ch.
US mortgage rates rose and remained high last year following Federal Reserve rate hikes; The 30-year flat rate remained at 6.63 percent after climbing over 7 percent earlier in the month. Although investors often use cash, they are also affected by high interest rates as they rely on non-mortgage loans to finance renovations and related expenses.
As a reminder, investors were active in the US housing market during the pandemic, taking advantage of low interest rates and strong demand. However, in March, 13.5 percent of the investors’ houses were sold at a loss. In the case of home conversions, which buy used homes that need renovation or dilapidation in order to resell at a high profit after renovation, the rate is 20.8 percent.
According to Er, the difficult situation in the US real estate market is exacerbated by banks’ strict lending practices that limit refinancing options. There are also growing warnings of high risks in the commercial real estate sector, raising concerns about a potential risk of infection. In contrast, such effects are significantly less pronounced or absent in Switzerland.
Ursina Kubli, Head of Real Estate Analysis at Zürcher Kantonalbank, explains four reasons why the current developments in the US market did not affect Switzerland so quickly: First, Swiss interest rates are lower than in the USA. Second, many property owners still have long-term, i.e. cheap mortgage contracts. Third, the Swiss real estate market is less liquid than in the US. Real estate owners tend to hold properties in particularly good locations. Fourth, the supply of rental housing in Switzerland is dwindling. This means that as rents rise, the risk of vacancy is low and property owners are in excellent condition.
Investor behavior has also changed in Switzerland
However, in the Swiss housing market, which has continued in recent months, there has been a significant change in investor behavior since 2022. “A rising interest rate environment has led investors to be more cautious, with a striking discrepancy between buyers’ and sellers’ price expectations,” he says. This change can be seen through two key indicators: increasing initial returns and decreasing liquidity level since the second half of 2022.
In addition, the market is characterized by a remarkable change in the supply of real estate. “As an increasing number of properties with sustainability gaps enter the market, high-quality properties are falling short. Properties that are difficult to renovate or that cannot be refurbished run the risk of becoming ‘idle assets’, which can lead to significant price drops,” warns Avobis Head of Research.
«The higher interest rate environment leads to more selective behavior in the transaction market. Asked by Cash.ch, Kubli replied that so-called pearls are hardly available in the sales market. On the other hand, smaller investment properties with a low ESG rating are coming to market in peripheral areas. Prices for investment properties are currently in a correction phase, which is at least partly due to the lower quality.
“Upgrade rates may make the problem worse”
Also, due to the flattening of the yield curve in some portfolios, which has exacerbated the liquidity problem, Saron mortgage holders are now feeling the full range of interest rate hikes. According to Er, this is due to the fact that the adjustments made in rents have not been realized in parallel with the rising financing costs. In response to these uncertainties, investors may have sold properties on a targeted basis and adjusted debt financing rates to secure liquidity. “Further rate hikes could worsen this problem, but adjustments to the mortgage reference rate will now allow for an increase in current rents. This should have a positive impact on the liquidity situation,” he continued.
But is Switzerland still threatened by a development similar to the one in the USA? In principle, favorable macroeconomic conditions – strong immigration, reduced construction activity and reduced vacancies – point to a positive long-term perspective for the housing market. However, in the short term, general uncertainties and difficult financing conditions may lead to market volatility and ultimately price corrections, according to Er.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
