Switzerland’s property market remains strong.
The Swiss housing market experienced healthy price increases during the last decade. From 2000 to 2010:
In 2010, the total number of new apartments completed was 40,167 units, up 3.9% from the previous year, but down from an annual average of 42,000 units from 2006 to 2008.
There were about 269,202 apartments under construction, up 11.14% from a year earlier. On the other hand, the total number of new apartments authorized dropped by 1.5% to 49,517 units over the same period. In the year to end-Q1 2011:
There are several possible reasons for the continued strength of the Swiss housing market:
However, the country’s economic growth is projected to slow to around 2% in 2011, with the Swiss franc appreciating at an uncontrollable pace. The official exchange rate stands at €1=CHF1.085 in early-August 2011, a rise of about 30% from the same period last year. Over the previous year, the franc has also soared about 32% against the US dollar.
The strong Swiss franc has been weakening exports and stoking inflation. Swiss National Bank (SNB), the country’s central bank, has introduced numerous measures to halt the franc’s rise to record levels against the beleaguered euro and US dollar.
In addition, there are speculations that SNB would further act to counter strength in the local currency by setting an exchange rate target against the euro. However, local analysts are doubtful whether implementing an exchange rate target would be effective given the nature of flows which have driven the appreciation of the franc. "Swiss strength is being driven by savings deposits and other real-money flows out of the euro zone and into Switzerland, rather than speculators," said Kiran Kowshik of BNP Paribas.
Despite this, residential property prices are expected to continue rising in 2011, albeit at a slower pace compared to the previous year, according to Credit Suisse.
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.
Swiss apartment prices boomed during the late 1980s and early 1990s, with rental apartment prices rising on average by 14% annually from 1988 to 1991.
Other properties’ prices rose strongly too. Single-family homes rose on average 13.87% a year from 1988 to 1989, and owner-occupied flats by 10.4%.
To tame what it saw as runaway house price inflation, the Swiss National Bank (SNB) aggressively raised interest rates. Mortgage rates rose to 7.9% in October 1992, up from 4.9% in January 1989. Since most Swiss mortgages then were variable rate (about 76% of all loans in 1994), the impact was severe.
Apartment prices fell by 9% in 1993, followed by another 9% in 1994, and 8.3% in 1996. From 1993 to 2000, apartment prices fell by an average of 6% yearly. The average price of single-family homes fell by an average of 2.57% annually from 1990 to 1999, while the price of owner-occupied flats fell 2.72% annually from 1991 to 1998.
Stagnating real incomes, slow population growth, weak net migration and increased housing supply led to further house price falls. By 2000, apartment prices were back to their 1987 level. The crash had wiped out a decade’s gains.
From a peak rate of more than 7% (1990 to 1992), mortgage rates then steadily fell as the SNB eased monetary policy. Mortgage rates dropped to an average of 4.3% in 2000-2001, and 3% from 2003 to 2006. This contributed greatly to the recovery of the housing market, with residential property prices bottoming out between 1999 and 2000.
Other positive factors were an increase in the number of net migrants, and the relaxation of ownership limits in some cantons (states).
Investors quickly snapped up new units when it was clear the housing market was recovering, as new units earn higher rents. Thus while the old rental apartments index rose 29.4% (18.9% in real terms) from 2000 to 2008, the new rental apartments index rose an astonishing 51% (38.6% in real terms), largely caused by a huge jump from mid-2001 to 2002 – the new rental apartments index rose 17.8% y-o-y, while the old rental apartments index rose by a mere 3%.
Developers responded by increasing the supply of new rental units, softening the price increases in 2004 and 2005. Owners of old units also refurbished or renovated their units. The increase in competition led to slower price increases and eventually price falls for new rental units.
Mortgage rates either fell or remained unchanged from 2004 to 2007. Mortgage rates only started rising in May 2007, and never rose above 3.5% during this period. Outstanding housing loans stood at CHF537.7 (€354) billion at the end of 2008, 74% up on the 2000 level. Much of the growth occurred in 2006, when outstanding mortgages rose 19% on a year earlier.
Switzerland’s mortgage market is one of the largest in the world – comparatively speaking - at more than 100% of GDP, since 2006.
As interest rate cuts were implemented by central banks around the world in Q4 2008, SNB reduced its key rate to almost 0% (0.03% in March 2009).
Mortgage rates are now at historic lows. Average interest rates for 5-year fixed rate mortgages dropped to 2.7% in Q1 2009, the lowest level for five years according to Comparis.ch, a consumer rating agency. Rates for mortgages with 10-year terms also dropped to 3.4%.
Swiss borrowers can choose between fixed and variable mortgages, or combine the two. To minimize risk exposure, mortgages are broken down into several loans, with different maturities and interest rate fixations.
Lenders are generally conservative. Borrowers must produce down payments of 20% to 5% of loan value. In 2004, 91% of all bank mortgages had loan-to-value (LTV) ratios of less than two-thirds of the property value.
Comparis.ch reports that less than 2% of property buyers availed of variable rate mortgages in Q1 2009, down from 22% in Q3 2008. On the other hand, 89% of buyers took fixed rate mortgages, up from 79% in Q4 2008.
Switzerland has a huge foreign resident population, working in international organizations, private corporations and financial institutions. One out of every 5 persons (20%) in Switzerland is a foreign resident, significantly affecting house price movements.
Foreign residents tend to remain ‘foreign’, because Switzerland has one of the world’s strictest citizenship requirements. It requires 12 years of “permanent, legal, notated” residency, full integration to Swiss culture and community, and mastery of one of the official languages.
The net rate of increase in foreign residents surged to 47,379 in 2007, and 67,984 in 2008, much higher than the average of 22,000 annually from 1999 to 2006, because in June 2007 quotas for EU and EFTA citizens were abolished.
The number of net migrants in 2009 is set to fall to around 60,000 due to the worsening economic outlook. Nevertheless, the inrush of foreign residents continues to boost demand for housing.
Switzerland has one of the lowest owner-occupancy rates in Europe at 35% (2000), while 64% of all households rent. One reason is extremely pro-tenant laws. Rent increases must be justified by the landlord’s cost increases. Tenants are also protected against eviction.
Owner-occupancy is also discouraged by taxation; property is treated as an asset subject to both wealth and income tax for imputed rental income. Income tax rates in Switzerland can easily exceed 50%, among the highest in the world. Capital gains are also taxed at cantonal level, with rates differing by duration of ownership. (see Taxes and Cost section)
Owner-occupancy, however, is slowly gaining popularity. The home ownership rate reached 36.5% in 2005, up from 31% in 1990, mainly due to an increase in apartment ownership. Changes in pension laws have helped - funds can now be withdrawn for house purchases from all pension accounts, both mandatory and voluntary.
The Swiss have long 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 title. Each canton has slightly different rules and the rules even vary from commune to commune within the canton.
Generally speaking, foreigners have the largest choice of properties in French-speaking cantons. The most liberal canton is Vaud, which includes mountain resorts such as Villars, where foreigners can buy virtually any property and resell immediately.
However by 2010 each canton will have the responsibility for its own foreign property acquisition laws, which may result to faster transfer of property titles as opposed to the current delays. This is expected to increase demand from foreign buyers.
Even with the gradual opening of the real estate market, the buy-to-let market remains off-limits to foreigners except for subsidized housing. The acquisition of residential real estate by foreigners for rental “requires prior authorization and is prohibited because there are no grounds for granting authorization,” according to the Federal Office of Justice.
A foreigner may be granted authorization to acquire a rental unit if he will construct subsidized housing, i.e. for the building of accommodation with a rent which is low and reasonable compared with similar premises in the same locality, or to acquire newly built housing of the same type when there is a local housing shortage. This reason for authorization applies only in cantons Fribourg, Geneva, Grisons, Jura, Neuchâtel, Ticino, Vaud and Valais.
Rental yields Switzerland’s major cities are quite low, at 3.5% to 5.3%. Apartments in Geneva, home to various international organizations such as the ILO, WHO, WTO, and the Red Cross, have gross yields of 3.5% - 4.6%. In Zurich, Switzerland’s biggest city and the financial capital, apartments have gross yields of 3.7% – 5.3%.
Swiss economic growth was relatively strong from 2004 to 2007, with average annual GDP growth of 2.9%. Growth slowed to 1.6% in 2008.
Switzerland officially entered recession in Q1 2009 with the economy expected to contract by as much as 3.9% in 2009, and 0.5% in 2010, the worst recession in over two decades. The country was last in recession in 2003, with a small contraction of 0.2%.
Although unemployment is less than half the EU average, the situation is deteriorating, rising from 2.5% in 2007 to 2.6% in 2008 and 3.4% in February 2009. Unemployment is expected to rise to more 4.5% in 2010.
The deteriorating economic situation is the strongest argument against further property price rises. The deteriorating economy may lead households to postpone purchases, leading to weaker house price growth or even price falls.
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