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Swiss house prices continue to fall
The nationwide average price of rental apartments fell 1.06% (-1.47% inflation-adjusted) during the year to end-Q3 2017, its seventh consecutive quarter of y-o-y falls, according to the Swiss National Bank (SNB). During the latest quarter, rental apartment prices fell 0.74% q-o-q (-0.44% inflation-adjusted).
From 2000 to 2016, Switzerland’s housing market saw strong house price increases:
- Owner-occupied dwelling prices rose by 80.5% (70.2% in real terms)
- Single-family home prices rose by 58% (49% in real terms)
- Rental apartments in old and new buildings rose by 49.2% (40.7% in real terms)
During the year to Q3 2017:
- Owner-occupied apartment prices were down by 0.76% (-1.17% inflation-adjusted), after annual rises of 1.46% in Q2 2017, 1.12% in Q1 2017, 1.2% in Q4 2016, and 1.38% in Q3 2016. It was actually the first quarter of y-o-y decline since Q1 2000.
- Single-family home prices increased by 2.4% (1.98% inflation-adjusted), after y-o-y rises of 2.22% in Q2 2017, 2.42% in Q1 2017, 1.45% in Q4 2016 and 1.36% in Q3 2016. However these price rises were below the average annual price rises of 4.5% between 2009 and 2013.
The property market's slowdown can be attributed to the Swiss National Bank's stricter lending criteria, designed to lower housing debt (currently 90% of all household debt). The decision of the central bank to abandon its cap against the euro in 2015 also made Swiss real estate more expensive for foreign investors, thereby reducing demand.
Nationwide house prices started to decline in 2016, when the price of rental apartments fell by 1.3% (-0.8% inflation-adjusted) from a year earlier.
“The main risk in the market for rented residential property is the growing supply overhang. There is a considerable mismatch between robust construction activities and stagnating demand,” said Wüest and Partner.
A surplus of close to 9,000 rented residential properties is expected this year, according to Wüest and Partner.
- Lake Geneva recorded the biggest price decline in residential rental apartments, at 5.7% (-5.3% inflation-adjusted) in 2016. It was the second consecutive year of annual price declines and the highest in two decades.
- Zurich had a house price decline of 2.5% (-2% inflation-adjusted) in 2016, after a y-o-y decline of 0.2% in 2015 and an annual growth of 3.4% from 2000 to 2013.
- Southern Switzerland had a house price decline of 2.2% (-1.8% inflation-adjusted) in 2016.
- Central Switzerland saw a house price fall of 1.9% (-1.5% inflation-adjusted) over the same period.
- Eastern Switzerland had a house price fall of 1.5% (-1% inflation-adjusted).
- Northwestern Switzerland had a house price drop of 0.5% (-0.1% inflation-adjusted).
- Western Switzerland recorded an annual house price increase of just 1% (1.4% inflation-adjusted).
- Berne’s house prices were unchanged in 2016 from a year earlier (0.4% increase when adjusted for inflation).
Switzerland’s economy remains sluggish, mainly due to weak investments and a decline in exports. In Q2 2017, the economy expanded by a meagre 0.3% from the same period last year, the lowest growth rate since Q4 2009, according to the State Secretariat for Economic Affairs. Quarter-on-quarter, the economy grew by just 0.3% in Q2 2017. The economy is expected to grow by 1% this year and by 1.3% in 2018, based on IMF estimates.
Poor rental yields in Geneva and Zurich
If you are buying in Switzerland it is usually not the rental yield that interests you, because in the past Swiss rental returns been comparatively poor, and in any case buying by foreigners is significantly restricted. But as the global house price boom has gathered steam over the past 15 years, Swiss rental returns have stayed steady. Swiss rental returns are still classified by us as "poor". But rental returns in much of the world are now worse than they used to be, and Swiss returns are no longer particularly low.
Luxury apartments in Geneva command average square metre (sq. m.) prices between EUR 11,400 to EUR 13,500.
In our sample, a 120 sq. m. apartment in Geneva costs on average EUR 11,460 per sq. m.. A 120 sq. m. apartment can be rented for around EUR 3,827 per month. That means a yield of around 3.33%
In Zurich, the average price per sq. m. for a 120 sq. m. apartment is around EUR 12,050. A 120 sq. m. apartment can be rented for around EUR 3,950 per month. That means a rental yield of around 3.27%.
Round trip transaction costs are moderate on residential property in Switzerland. See our Swiss residential property transaction costs analysis and Transaction costs in Switzerland compared to other countries
Swiss rental income tax is very high
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.
Total transaction costs are low in Switzerland
Closing costs are relatively low in Switzerland. Roundtrip transaction costs, i.e. the total costs of buying and selling a property, range from 3.5% to 8.9%. The estate agent's fee comprises a large chunk of the cost at roughly 3% to 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.
Swiss law is pro-tenant
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.
Sluggish economic growthSwitzerland’s economy remains sluggish, amidst weaker investments and a decline in exports. In Q2 2017, the economy expanded by a meagre 0.3% from the same period last year, down from annual growth rates of 0.6% in both Q4 2016 and Q1 2017, 1.5% in Q3 2016 and 2% in Q2 2016 and the the lowest growth rate since Q4 2009, according to the State Secretariat for Economic Affairs.
Quarter-on-quarter, the economy grew by just 0.3% in Q2 2017, a slight improvement from the previous quarter’s 0.1% growth.
In 2016, the economy expanded by 1.4%, after growing by 1.2% in 2015, 2.5% in 2014, 1.9% in 2013, and 1% in 2012, according to the IMF. The Swiss economy has suffered in recent years mainly due to the franc, which is considered as “significantly overvalued”, despite record low interest rates. However, prospects in the export sector is now improving, given the recent weakening of the franc and the stronger growth in the euro area.
The economy is expected to grow by 1% in 2017 and by 1.3% in 2018, based on IMF estimates.
In October 2017, unemployment stood at 3%, unchanged in the past five months but lower than the previous year’s 3.2%, according to the State Secretariat for Economic Affairs.
Consumer prices are now gradually rising in Switzerland. In September 2017, core deflation stood at 0.51%, according to the Swiss Federal Statistical Office. Consumer prices fell by an average of 0.4% from 2012 to 2016.
Swiss franc depreciates at last, easing pressure on exporters
On January 15, 2015 the Swiss franc soared against major currencies when the SNB removed its CHF1.20 = EUR 1 exchange rate cap. Immediately the Swiss franc gained 39% against the euro and almost 30% against the US dollar.
The cap was introduced in 2011, when investors fled the crisis-torn Euro for Swiss assets, putting pressure on exports. However recently the SNB decided to abandon the cap in face of monetary easing by the European Central Bank (ECB), believing that increased demand for safe haven currencies such as the Swiss franc would make it impossible to defend the cap.
However, as confidence for the European single currency improves following the election of Emanuel Macron in France, and the resolution of problems at banks in Spain and Italy, demand for safe assets such as the Swiss franc has been weakening.
As such, the franc depreciated against the euro by 5.7% in the past 12 months, with an average monthly exchange rate of CHF1.1542 = EUR 1 in October 2017, the lowest level for almost 3 years, according to the Swiss National Bank.