Swiss house price rises continue, albeit at a slower pace
July 21, 2014
House prices in Switzerland continue to rise, though there are signs of slowdown in some market segments, according to the Swiss National Bank (SNB).
During the year to end-June 2014:
- Owner-occupied apartment prices rose by 1.5% (1.4% inflation-adjusted)
- Single-family home prices rose by just 0.5% (0.4% inflation-adjusted)
- Rental apartments gained 3.4% (3.3% inflation-adjusted) for old buildings and 1.5% (1.4% inflation-adjusted) for new buildings
The reasons? An increase in the number of immigrants has led to higher demand for houses. In addition, some Swiss citizens and residents moved their investments back to Switzerland’s relatively stable domestic housing market, after the collapse of house prices in other countries.
However, local price variations were diverse. Northwestern Switzerland recorded the biggest price gain in owner-occupied apartments, at 3.9% (3.8% inflation-adjusted) in June 2014 from a year earlier. It was followed by Southern Switzerland, with an annual house price increase of 2.9% (2.8% inflation-adjusted), Eastern Switzerland, with a price rise of 1.6% (1.5% inflation-adjusted) and Central Switzerland with a price increase of 1.1% (1.0% inflation-adjusted).
Some regions are experiencing falling house prices. During the year to June 2014, Zurich area saw the biggest house price drop of 1.9% (-2% inflation-adjusted). Other areas which recorded minimal house price falls include Lake Geneva area (-0.8%), Berne area (-0.6%), and Western Switzerland (-0.2%).
Switzerland’s housing market saw strong house price increases from 2000 to 2012:
- Owner-occupied dwelling prices rose 67.2% (54% in real terms)
- Single-family home prices rose 44.9% (33.6% in real terms)
- Rental apartments in old and new buildings had price growth of 44% (32.7% in real terms)
The continued rise in house prices can be attributed to very low mortgage interest rates, a countermeasure to the Swiss franc’s appreciation. The average interest rate for mortgages with a maturity of over 6 months to 1 year was slightly down to 1.57% in March 2014, from 1.59% a year earlier. The average interest rate for mortgages with a maturity of 2-3 years fell from 1.6% to 1.47%. The average interest rate for mortgages with a maturity of 5-7 years was slightly up from 1.74%, to 1.88%.
The Swiss real estate bubble index (maintained by UBS) is up by 7% from a year earlier, though it fell slightly in Q1 2014 on a quarter-to-quarter basis.
Swiss property is expected to remain stable in 2014, according to Credit Suisse Economic Research.
The economy expanded by 2% in 2013, after growing by 1% in 2012, 1.8% in 2011 and 3% in 2010, according to the International Monetary Fund (IMF). Economic growth of 2% is forecast for 2014 despite the European Union’s slowdown, according to the State Secretariat for Economics (SECO).
New units led the 2000s boom
From 2000 up to present, the Swiss housing market enjoyed robust price increases, due to SNB’s monetary policy of easing in the late 90s and early 2000s. From a peak rate of more than 7% (1990 to 1992), 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 after the great housing crash of the 1990s, with residential property prices bottoming out between 1999 and 2000.
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, when 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. 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.
Interest rates to rise?
The period of low mortgage rates may be nearing its end. Comparis.ch noted that the fixed rate for mortgages over 5 years rose to 1.9% in Q2 2013, compared to 1.6% the previous quarter. Rates for loans with maturity of 10 years rose to 2.6% from 2.2%.
In February 2013, the Federal Council decided to implement a countercyclical capital buffer (CCB) to prevent the real estate market from further overheating. As of September 30, 2013, banks are required to hold 1% of the risk-weighted assets in their mortgage portfolios.
Outstanding mortgage loans amounted to CHF 629.5 (€514.96) billion at end 2012, 6% up on the previous year, and up by 104% since 2000.
Interest rates started rising slightly in May 2007, but never rose above 3.5%. Rate cuts were then implemented by central banks around the world, and SNB reduced its key rate to almost 0% (0.03% in March 2009). Switzerland’s low interest rates were also a result of SNB’s attempt to contain Swiss franc appreciation. The variable mortgage rate followed suit, and was 2.69% in July 2013, unchanged since December 2011.
Swiss 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.
Foreigners are settling in Switzerland in large numbers
Switzerland has one of the highest rates of foreign populations among European countries. From around 14.7% in 1910, the proportion of foreigners in Switzerland rose to 23.3% in 2012, significantly affecting house price movements. Europeans account for 85% of the permanent foreign resident population.
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 annual increase of permanent foreign residents has risen sharply, from an average of 21,360 1999-2006, to 67,622 in 2008, with some fallback after that. In 2012 the net increase in permanent foreign residents was 53,975.
Due to the increase Switzerland introduced new quotas for EU citizens in 2013:
- For the 17 older EU states, long-term residence permits are capped at 53,700 for 12 months from June 1.
- The number of long term residence permits for immigrants from Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia will be capped at 2,180.
- Immigration from the two newest EU states - Bulgaria and Romania, is severely restricted.
These quotas can last for only 12 months in accordance to the freedom of movement rules signed by Switzerland in 1999.
Foreign buying is severely restricted
The Swiss have long restricted the sale of property to foreigners. 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. In addition, the Federal government has set an annual quota of permits for non-resident foreigners seeking to acquire property in Switzerland.
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.
Low rental yields; buy-to-let is not for foreigners
Rental yields in Switzerland’s major cities are quite low. In Geneva, home to several international organizations, i.e. Red Cross, WTO, WHO and ILO, rental apartments yield from 2.83% to 3.08%. Smaller apartments have higher rental yields as compared to their larger counterparts.
Zurich, Switzerland’s biggest city and the financial capital, have higher gross rental yields for apartments than in Geneva. Yields ranges from 3.35% to 3.5%, according to the Global Property Guide research of August 2012.
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 constructs 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 applies only in cantons Fribourg, Geneva, Grisons, Jura, Neuchâtel, Ticino, Vaud and Valais.
Pro-tenant laws discourage owner-occupancy
Switzerland has one of the lowest owner-occupancy rates in Europe. However, there has been a trend to greater home ownership, which increased from 31% of the total in 1990, to 43.8% in 2011, according to Eurostat. Changes in pension laws helped - funds can now be withdrawn for house purchases from all pension accounts, both mandatory and voluntary. However, the proportion of renters remains high at around 56.2%.
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.
Modest economic growth in 2014
Switzerland’s economy expanded by a modest 2% in 2013, after growing by 1% in 2012, 1.8% in 2011 and 3% in 2010, according to the International Monetary Fund (IMF). In the first quarter of 2014, the economy grew by 2%, according to the State Secretariat for Economics (SECO).
The economic growth forecast for 2014 was cut from the initial 2.2% to 2%, mainly due to a sluggish outlook for exports amidst the European Union’s slowdown, according to SECO.
"(We) continue to expect the economic upturn to strengthen up to 2015," the SECO said. "However, the economic recovery may be somewhat slower than was forecast in March due to lagging exports."
Economic growth was relatively strong from 2004 to 2007, with average annual GDP growth of 3.2%. However with the global financial crisis, economic growth slowed to 2.2% in 2008. By the 4th quarter of 2008 Switzerland was in recession. GDP contracted by as much as 1.9% in 2009.
Switzerland has experienced a sharp currency appreciation. The Swiss franc rose past the US$1.10 mark in March 2011. It went to US$1.20 in June 2011 during the Greek sovereign-debt crisis. It surged to US$1.30 in August 2011.
Because of this, the SNB introduced measures to halt the franc’s rise:
- The 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 bottleneck financing facility rate was 0.59% in June 2011.
The SNB announced an official 1.20 per euro cap on the strengthening franc, after investors fleeing the euro zone crisis bid the safe-haven currency up to record levels
In May 2014, the overall unemployment rate stood at 3.2%, unchanged from a year earlier. From 2000 to 2013, the country’s unemployment rate averaged 3%, according to the IMF.
Inflation is expected to be 2% in 2014, after deflation of 2% in 2013 and 0.7% in 2012. In Q1 2014, inflation was just 0.1%.