The Swiss housing market is now showing signs of overheating, as property demand and house prices continue to rise in Q3 2012. Rents also continue to rise, which is reassuring, though not as much.
During the year to end-Q3 2012:
The Swiss housing market experienced robust price increases from 2000 to 2011:
The Swiss real estate bubble index devised by UBS, an indicator of the health and viability of the housing market, suggested that the Swiss property market edged up into the risk zone in Q3 2012, for the first time since the country’s 1980s real estate bubble. The UBS Swiss real estate index climbed to 1.02 in Q3 2012, up from 0.82 the previous quarter, pushing it above 1.0, which UBS considers the threshold for risk emergence in the property market. However it is important to note that “risk” is different from “bubble” and UBS is not yet saying that there is a bubble.
The index classifies values into five categories in order of increasing risk: slump (below -1), balance (between -1 and 0), boom (between 0 and 1), risk (between 1 and 2) and bubble (above 2).
The real estate bubble index is based on the following sub-indices:
There are several possible reasons for the continued strength of the Swiss housing market:
Mortgage interest rates in Switzerland are very low. The average variable mortgage interest rate (not linked to a base rate of interest) was 2.99% in July 2012, almost unchanged from a year earlier, according to figures from the SNB. On the other hand, the average fixed mortgage interest rate was 1.68% in July 2012, down from 1.99% in the previous year.
In Q2 2012, the total number of new apartments completed rose by 19.6% to 10,647 units from the previous quarter, but down 8.2% from a year earlier.
The total number of apartments under construction increased by 6.1% q-o-q and by 5.9% y-o-y to 74,040 units in Q2 2012. On the other hand, the total number of new apartments authorized rose by 22.4% to 15,007 units in Q2 2012 from the previous quarter but down by 10.3% from a year earlier.
The metropolitan areas of Zurich, Geneva, and Lausanne, as well as low tax locations like Zug and Alpine tourist resorts such as Davos have experienced the sharpest house price increases in recent years and are among the areas most threatened by overheating, according to the UBS report.
"Although population growth continues to favor price increases, high prices are increasingly being supported by the demand for real estate as an investment as well as by low interest rates, and the strong increase in household mortgage debt is showing no signs of abatement," Claudio Saputelli, head of UBS real estate research unit said. "This represents a dangerous trend, as both drivers could easily be thrown into reverse and therefore trigger a price correction," Saputelli added.
In an effort to cool the housing market, the country’s regulator, Swiss Financial Market Supervisory Authority (FINMA), toughened mortgage lending standards in July 2012. However, the SNB has been forced to keep its key interest rates at record low to prevent the Swiss franc from appreciating at an uncontrollable pace.
The Swiss have for a long time restricted the sale of property to foreigners. Now the Federal government has set an annual quota of permits for non-resident foreigners seeking to acquire property in Switzerland. In addition, cantonal authorization is needed before gaining a title. Each canton has slightly different rules, varying from commune to commune within the canton.
However in 2010 each canton gains responsibility for its own foreign property acquisition laws, which will result in faster transfer of property titles.
Foreigners cannot acquire residential real estate for buy-to-let investments except for subsidized housing, which has below market rents.
During the year to end-Q3 2012:
- The price of owner-occupied apartments rose by 6.3% (6.9% in real terms), according to the Swiss National Bank (SNB), the country’s central bank.
- The price of single-family homes increased by 3.6% (4.2% in real terms)
- The house price index for rental apartments in old buildings rose by 2.72% (3.27% in real terms)
The Swiss housing market experienced robust price increases from 2000 to 2011:
- Prices of owner-occupied dwellings increased by 62.1% (49.9% in real terms)
- Prices of single-family homes rose by 41% (30.4% in real terms)
- Prices of rental apartments in old and new buildings rose by 41.1% (30.8% in real terms)
The Swiss real estate bubble index devised by UBS, an indicator of the health and viability of the housing market, suggested that the Swiss property market edged up into the risk zone in Q3 2012, for the first time since the country’s 1980s real estate bubble. The UBS Swiss real estate index climbed to 1.02 in Q3 2012, up from 0.82 the previous quarter, pushing it above 1.0, which UBS considers the threshold for risk emergence in the property market. However it is important to note that “risk” is different from “bubble” and UBS is not yet saying that there is a bubble.
The index classifies values into five categories in order of increasing risk: slump (below -1), balance (between -1 and 0), boom (between 0 and 1), risk (between 1 and 2) and bubble (above 2).
The real estate bubble index is based on the following sub-indices:
- Home prices relative to annual rent: In Q3 2012, the ratio between house prices and rents increased from the previous quarter and now stands at 28.1. This means that purchase prices continue to rise much more quickly than asking rents.
- Home prices relative to household income: The ratio between house prices and annual household income rose to 5.9 in Q3 2012, up from 5.8 in the previous quarter.
- Construction relative to GDP: The share of construction activity in GDP is equivalent to 9.1%, below the long-term average.
- Home prices relative to consumer prices: In Q3 2012, house prices continue to rise while consumer prices were down by 0.2% from the previous quarter.
- Mortgage volume relative to income: Mortgage volume continues to rise sharply, as incomes stagnate.
There are several possible reasons for the continued strength of the Swiss housing market:
- Low interest rates, which resulted to record low mortgage rates, spurred strong real estate demand.
- Low vacancy rates, as low as 0.1% in Zurich and Lausanne, are also putting an upward pressure on house prices.
- Switzerland is widely viewed as a “safe haven” by wealthy foreigners.
- An increase in the number of immigrants has led to higher demand for houses. Over the past four years, net migration totaled 330,000 people.
- After the collapse of house prices in other countries, Swiss citizens and residents moved their investments back to the domestic housing market which is relatively more stable.
- The Swiss economy emerged from recession in mid-2009, and the economy expanded 3.03% in 2010 and by 1.93% in 2011. However, economic growth is expected to slow to 0.9% in 2012, amidst the euro area’s fiscal crisis and waning demand for its export products.
Mortgage interest rates in Switzerland are very low. The average variable mortgage interest rate (not linked to a base rate of interest) was 2.99% in July 2012, almost unchanged from a year earlier, according to figures from the SNB. On the other hand, the average fixed mortgage interest rate was 1.68% in July 2012, down from 1.99% in the previous year.
In Q2 2012, the total number of new apartments completed rose by 19.6% to 10,647 units from the previous quarter, but down 8.2% from a year earlier.
The total number of apartments under construction increased by 6.1% q-o-q and by 5.9% y-o-y to 74,040 units in Q2 2012. On the other hand, the total number of new apartments authorized rose by 22.4% to 15,007 units in Q2 2012 from the previous quarter but down by 10.3% from a year earlier.
The metropolitan areas of Zurich, Geneva, and Lausanne, as well as low tax locations like Zug and Alpine tourist resorts such as Davos have experienced the sharpest house price increases in recent years and are among the areas most threatened by overheating, according to the UBS report.
"Although population growth continues to favor price increases, high prices are increasingly being supported by the demand for real estate as an investment as well as by low interest rates, and the strong increase in household mortgage debt is showing no signs of abatement," Claudio Saputelli, head of UBS real estate research unit said. "This represents a dangerous trend, as both drivers could easily be thrown into reverse and therefore trigger a price correction," Saputelli added.
In an effort to cool the housing market, the country’s regulator, Swiss Financial Market Supervisory Authority (FINMA), toughened mortgage lending standards in July 2012. However, the SNB has been forced to keep its key interest rates at record low to prevent the Swiss franc from appreciating at an uncontrollable pace.The Swiss have for a long time restricted the sale of property to foreigners. Now the Federal government has set an annual quota of permits for non-resident foreigners seeking to acquire property in Switzerland. In addition, cantonal authorization is needed before gaining a title. Each canton has slightly different rules, varying from commune to commune within the canton.
However in 2010 each canton gains responsibility for its own foreign property acquisition laws, which will result in faster transfer of property titles.
Foreigners cannot acquire residential real estate for buy-to-let investments except for subsidized housing, which has below market rents.
Analysis of Switzerland Residential Property Market »
RENTAL YIELDS
Last Updated: Aug 29, 2012
Luxury apartments in Geneva command average square metre (sq. m.) prices between EUR 13,000 to EUR 14,000.
In our sample, a 120 sq. m. apartment in Geneva costs on average EUR 12,600 per sq. m., 11% more than last year (but due to the small sample size, this is not reliable as a basis for price-comparisons).
Rents on apartments in Geneva range from EUR 31 to 34 per sq. m. per month. A 120 sq. m. apartment can be rented for around EUR 3,700 per month.
The gross rental yield for apartments in Geneva is very poor, ranging from 2.83% to 3.08%. Smaller apartments tend to earn higher rental yields. For example, a 60 sq. m. apartment returns 3.08% rental yields, while a 120 sq. m. apartment returns 2.94% rental yield. A 225 sq. m. apartment returns only 2.83% rental yield.
In Zurich, the average price per sq. m. for a 120 sq. m. apartment is around EUR 10,200.
Rents on apartments in Zurich range from EUR 29 to EUR 31 per sq. m. per month. A 120 sq. m. apartment can be rented for around EUR 3,600 per month.
Rental yields for apartments in Zurich are somewhat better than apartments in Geneva, at 3.35% to 3.50%.
In our sample, a 120 sq. m. apartment in Geneva costs on average EUR 12,600 per sq. m., 11% more than last year (but due to the small sample size, this is not reliable as a basis for price-comparisons).
Rents on apartments in Geneva range from EUR 31 to 34 per sq. m. per month. A 120 sq. m. apartment can be rented for around EUR 3,700 per month.
The gross rental yield for apartments in Geneva is very poor, ranging from 2.83% to 3.08%. Smaller apartments tend to earn higher rental yields. For example, a 60 sq. m. apartment returns 3.08% rental yields, while a 120 sq. m. apartment returns 2.94% rental yield. A 225 sq. m. apartment returns only 2.83% rental yield.
In Zurich, the average price per sq. m. for a 120 sq. m. apartment is around EUR 10,200.
Rents on apartments in Zurich range from EUR 29 to EUR 31 per sq. m. per month. A 120 sq. m. apartment can be rented for around EUR 3,600 per month.
Rental yields for apartments in Zurich are somewhat better than apartments in Geneva, at 3.35% to 3.50%.
TAXES AND COSTS
Last Updated: Sep 17, 2012
Rental Income: Income is taxed at the federal, cantonal and municipal levels. The total tax liability could easily exceed 50%. Federal tax rates range from 0% to 11.5%.
Capital Gains: Capital gains are tax-free at the federal level (unless the gains are from the sale of business property). All cantons, however, levy their own taxes on gains from the disposal of immovable property located in the canton.
Inheritance: Inheritance tax is levied at the cantonal level, on the net assets transferred to the beneficiaries.
Residents: Residents are liable to pay federal, cantonal and municipal income taxes on their worldwide income.
Capital Gains: Capital gains are tax-free at the federal level (unless the gains are from the sale of business property). All cantons, however, levy their own taxes on gains from the disposal of immovable property located in the canton.
Inheritance: Inheritance tax is levied at the cantonal level, on the net assets transferred to the beneficiaries.
Residents: Residents are liable to pay federal, cantonal and municipal income taxes on their worldwide income.
BUYING GUIDE
Last Updated: Mar 23, 2007
Closing costs are relatively low in Switzerland. Roundtrip transaction costs, i.e., the total cost of buying and selling a property, range from 3.5% to 9%. The estate agent’s fee comprises a large chunk of the cost at roughly 3% - 5% (plus 7.6% VAT), usually paid by the seller.
The buyer pays the Real Estate Transfer Tax which ranges from 0.2% to 3.3%, depending upon the canton. Since January 2005, Transfer Tax has been abolished in Zurich.
The buyer pays the Real Estate Transfer Tax which ranges from 0.2% to 3.3%, depending upon the canton. Since January 2005, Transfer Tax has been abolished in Zurich.
LANDLORD AND TENANT
Last Updated: May 25, 2006
Around 61% of all households are renters; so it is not surprising that the law in Switzerland is pro-tenant.Rents: he initial rent can be freely agreed between the landlord and tenant. However, within 30 days the tenant can appeal against the rent as abusive.
Tenant Security: Tenancies tend to revert to indefinite duration tenancies. This is not necessarily a disaster for the landlord, because three months termination notice can be given by either side.
But the court may give the tenant an extension of up to four years, in cases where and eviction would cause hardship.
ECONOMIC GROWTH
Last Updated: Nov 21, 2012
Switzerland’s economic growth slowing
Land-locked in the heart of central Europe with a population of 7.6 million, Switzerland is one of the richest countries in the world (GDP/capita of US$83,073 in 2011). Swiss voters have repeatedly rejected EU membership.Economic growth was relatively strong from 2004 to 2007, with an average annual GDP growth of 3.2%. However with the global financial crisis, economic growth slowed to 1.9% in 2008. Switzerland officially entered recession in Q1 2009 with the economy contracting by as much as 1.9% in 2009. In 2010, Switzerland’s export-dependent economy bounced back, registering a real GDP growth rate of 3.03%. Then in 2011, economic growth slowed to 1.9%, as exports fell due to the strong Swiss franc.
The year to August 2011 saw a dramatic rise in the value of the Swiss franc. The official exchange rate stood at €1=CHF1.085 in early-August 2011, up 30% on the same period last year, or about 32% against the US dollar.
Because of this, the Swiss National Bank (SNB) introduced numerous measures to halt the franc’s rise:
- The Franc’s money market liquidity was almost quadrupled. SNB boosted its monetary base from CHF30 billion to CHF80 billion. Then in August 10, 2011, SNB announced a further increase to CHF120 billion.
- Currency swaps were introduced
- The key rate was slashed to close to zero in August 3, 2011. The special rate for bottleneck financing facility was 0.59% in June 2011.
- In September 2011, the SNB announced an official 1.20 per euro cap on the strengthening franc.
In October 2012, the official exchange rate stood at €1 = CHF1.2069.
In 2012, economic growth in Switzerland is expected to slow to 0.9%.
Consumer prices fell by an annualized rate of 0.2% in October 2012. The SNB’s mandate must keep inflation positive but below 2%, according to the Swiss Federal Statistics Office (SFSO). Swiss inflation averaged 0.89% from 1994 to 2007, but rose to 2.4% in 2008 due to high global food and fuel prices, followed by deflation of 0.48% in 2009, and minimal inflation of 0.69% in 2010 and 0.23% in 2011. The inflation rate is expected at 0.6% in 2012 and 0.5% in 2013.The unemployment rate slightly increased to 3% in October 2012, from 2.9% in September 2012, according to the State Secretariat for Economic Affairs (SECO).
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