Swiss house prices are now falling
December 22, 2016
After about 15 years of uninterrupted house price rises, the Swiss government’s efforts to cool Switzerland's overheated property market have paid off.
During the year to end-Q3 2016, the nationwide average price of rental apartments dropped 1.28% (-1.15% inflation-adjusted), its third consecutive quarter of y-o-y falls, according to the Swiss National Bank (SNB). During the latest quarter, rental apartment prices dropped 0.22% q-o-q (increased 0.13% when adjusted for inflation).
- Old residential rental apartments: down by 1.2% on average (-1.07% inflation-adjusted) during the year to Q3 2016, after annual declines of 1.5% in Q2 2016 and 0.7% in Q1 2016, and y-o-y rises of 1.4% in Q4 2015 and 2.4% in Q3 2015.
- New residential rental apartments: down by 3.45% on average (-3.33% inflation-adjusted) y-o-y in Q3 2016, after annual declines of 3.65% in Q2 2016, 1.97% in Q1 2016, 2.69% in Q4 2015, 1.3% in Q3 2015, and 3% in Q2 2015.
Owner-occupied apartment prices were up by only 1.38% (1.51% inflation-adjusted) during the year to Q3 2016, far below the average annual price rises of 5.4% between 2009 and 2012. On the other hand, single-family home prices increased by 1.36% (1.49% inflation-adjusted) y-o-y in Q3 2016, after annual rises of 1.17% in Q2 2016, 1.26% in Q1 2016, 2.29% in Q4 2015, and 2.01% in Q3 2015.
The property market's slowdown can be attributed to efforts by the federal government and the Swiss National Bank to cool the market, using stricter lending criteria to lower housing debt (currently 90% of all household debt). The recent decision of the central bank to abandon its cap against the euro also made Swiss real estate more expensive for foreign investors, thereby reducing demand, according to Wueest & Partner AG, a real estate consulting firm.
- Lake Geneva recorded the biggest price decline in residential rental apartments, at 5.4% (-5% inflation-adjusted) during the year to Q3 2016
- Zurich had a house price decline of 2.2% (-1.8% inflation-adjusted) over the same period
- Southern Switzerland had a house price decline of 2% (-1.6% inflation-adjusted)
- Central Switzerland saw a house price fall of 1.6% (-1.2% inflation-adjusted)
- Eastern Switzerland had a house price fall of 1.5% (-1.2% inflation-adjusted)
- Northwestern Switzerland had a house price drop of 0.6% (-0.2% inflation-adjusted)
- Western Switzerland recorded an annual house price increase of just 0.8% (1.2% inflation-adjusted)
- Berne’s house prices were unchanged during the year to Q3 2016 (0.4% increase when adjusted for inflation)
The Swiss property market is expected to continue to see modest house price falls in the coming months, amidst a weak economy and regional uncertainties brought about by the Brexit vote, according to local property experts.
Switzerland’s economy unexpectedly stagnated in Q3 2016, amidst weaker government spending and a decline in exports. Quarter-on-quarter, real GDP growth fell to zero, down from 0.6% growth in the previous quarter, according to the State Secretariat for Economic Affairs. The economy is expected to grow by 1% this year, after the central bank gave up its cap on the Swiss franc last year. The economy expanded by just 0.8% in 2015, after growing by 1.9% in 2014, 1.8% in 2013, 1.1% in 2012, 1.9% in 2011 and 2.9% in 2010, according to the International Monetary Fund (IMF).
Local house price variations
In Switzerland, the median asking price for owner-occupied apartments was CHF 6,800 (€6,324) per square metre (sq. m.) in Q2 2016, according to Wüest and Partner. Over the same period, the median asking price for single-family homes was CHF 1.19 million (€1.11 million).
Geneva had the most expensive owner-occupied apartments while Zurich had the highest prices for single-family homes during Q2 2016.
For owner-occupied apartments:
- In Geneva, the median asking price was CHF 11,710 (€10,891) per sq. m.
- In Zurich, the median asking price was CHF 11,260 (€10,472) per sq. m.
- In Lausanne, the median asking price was CHF 9,090 (€8,454) per sq. m.
- In Basel, the median asking price was CHF 8,210 (€7,635) per sq. m.
- In Berne, the median asking price was CHF 6,700 (€6,231) per sq. m.
For single-family homes:
- In Zurich, the median asking price was CHF 1.62 million (€1.51 million)
- In Geneva, the median asking price was CHF 1.44 million (€1.34 million)
- In Lausanne, the median asking price was CHF 1.2 million (€1.12 million)
- In Basel, the median asking price was CHF 1.18 million (€1.1 million)
- In Berne, the median asking price was CHF 1.11 million (€1.03 million)
From 2000 to 2012 Switzerland's property market boomed
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 rose by 44% (32.7% in real terms)
The robust price increases were due to SNB’s monetary easing in the late 90s and early 2000s, after the great housing crash of the 1990s. From a peak 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.
Investors quickly snapped up new units when it was clear that the housing market was recovering, as new units earn higher rents. The old rental apartments index rose 29.4% (18.9% in real terms) from 2000 to 2008, but the new rental apartments index rose an astonishing 51% (38.6% in real terms). There was 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 units.
House price rises slowed sharply in the second half of 2008, due to the global crisis. They increased in 2009-10, albeit at a much slower pace, and accelerated again in 2011, as global economy started to recover. The housing market registered modest house price increases since then.
Mortgage interest rates are amazingly low
Mortgage interest rates have continued to fall. In September 2016, average interest rates for newly drawn mortgage loans were:
- Variable: 2.64%, slightly down from 2.68% a year ago
- Fixed with up to 1 year maturities: 1.13%, down from 1.19% a year ago
- Fixed with up to 3 years maturities: 1.11%, down from 1.17% a year ago
- Fixed with up to 5 years maturities: 1.18%, down from 1.32% a year ago
- Fixed with up to 7 years maturities: 1.32%, down from 1.57% a year ago
- Fixed to 10 years: 1.52%, down from 1.95% a year ago
However, it is now harder to get a loan. The Federal Council decided in February 2013 to implement a countercyclical capital buffer (CCB) to prevent the real estate market from further overheating.
From September 30, 2013 banks were required to hold 1% of all risk-weighted assets in their mortgage portfolios. As a result, mortgage interest rates started to rise in 2013, but never rose above 3%. Then in January 2014 the CCB was raised to 2%, mainly to ease risks for banks from rising house prices and to prevent a housing bubble.
Despite this, mortgage rates dropped again in 2014 because the central bank’s key rate fell to a range of -0.75% to 0.25% in December 2014, as a result of SNB’s attempt to contain Swiss franc appreciation. In December 2016, the central bank kept the key rate at a range of -0.25% to -1.25%, unchanged since January 2015.
Swiss lenders are generally conservative. Borrowers must produce down payments of 20% to 5% of loan value. In 2015, about 90% of all bank mortgages had loan-to-value (LTV) ratios of less than two-thirds of the property value.
Mortgage market remains highly leveraged
The size of Switzerland's mortgage market was around 145% of GDP in 2015, up from 140% of GDP in 2014, and far higher than the about 97% of GDP in 2000 and just 60% of GDP in 1990, based on figures from the SNB.
In September 2016, outstanding mortgage loans amounted to about CHF948.81 billion (€884.7 billion), up by about 2.6% from the same period last year, and up by 113% since 2000. Of the total outstanding mortgage loans, about 99% were domestic while the remaining 1% were foreign. The continued surge in mortgage loans can be mainly attributed to record low interest rates.
Foreigners are settling in Switzerland in large numbers
Switzerland has the world’s largest number of permanent immigrants per capita in 2015, at almost 25% of the total population, according to the State Secretariat for Migration (SEM). This is significantly affecting house price movements.
In 2015, there were more than 2 million foreign nationals residing permanently in Switzerland – representing a quarter of the country’s 8.2 million population. Europeans accounted for about 85% of the permanent foreign resident population in the country. More specifically, Italians accounted for the biggest group of foreigners living in the country, followed by Germans, Portuguese, French and Kosovans.
Geneva has the highest number of foreigners at 41%, followed by the cantons of Basel City (35%), and Vaud (34%).
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 2015, the net increase in permanent foreign residents was 71,495, down from 78,902 in 2014 but sharply up from 53,975 in 2012.
In terms of migration of both Swiss and foreigners, about 188,500 people arrived to live in Switzerland in 2015, while 116,600 people left the country, leaving a net migration of 71,900 people.
Foreign property purchases 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.
Poor 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 2.8% to 3.3% in August 2016, down from 3.2% to 3.8% from two years ago, according to Global Property Guide research. Smaller apartments have higher rental yields as compared to their larger counterparts.
Zurich, Switzerland’s biggest city and the financial capital, gross rental yields for apartments stood at an average of 3.27% in August 2016, almost unchanged from two years ago.
In Geneva, a 120 sq. m. apartment can be rented for around €3,827 per month in August 2016, according to Global Property Guide. On the other hand, in Zurich, the same property can be rented for around €3,950 per month.
Rents increased by an average of 0.5% in 2015 from the previous year, according to real estate firm Wüest and Partner. Rents are projected to slightly drop by 0.3% this year, the first time in 10 years, amidst weakening demand and rising supply, based on the prediction of Wüest and Partner.
“High construction activity has contributed to a 26% rise in supply in the past twelve months. 158,000 units were available to rent in Switzerland in mid-2016 – the highest level since 1997,” said Wüest and Partner.
“While the number of rental apartments on offer has increased, demand has weakened. This is partly due to slower population growth,” added Wüest and Partner.
- In Western Switzerland, rents are expected to drop by 0.8% y-o-y in 2016
- In the Lake Geneva area, rents are expected to fall by 0.6% y-o-y in 2016
- In the canton of Valais, rents will fall by about 2.1% y-o-y in 2016
- In the Greater Zurich area, rents are expected to rise slightly by 0.3% y-o-y in 2016
- In the Italian-speaking Ticino, rents are expected to rise by 0.8% y-o-y in 2016
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.
Switzerland has one of the lowest owner-occupancy rates in Europe. However, there has been a trend to more home ownership, which increased from 31% of the total in 1990, to about 44% recently, according to figures from the Eurostat and the Freddie Mac. 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 tax, and to 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.
Swiss franc appreciates strongly, after SNB scraps the exchange rate cap
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. Switzerland's exporters cried foul when 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.
The exchange rate cap stopped the appreciation of the domestic currency against major currencies.
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.
As of November 2016, the franc appreciated by 11.5% against the euro, at an average monthly exchange rate stood at CHF1.0759 = EUR 1, according to the Swiss National Bank.
Sluggish economic growth
Switzerland’s economy unexpectedly stagnated in Q3 2016, amidst weaker government spending and a decline in exports. Quarter-on-quarter, real GDP growth fell to zero, down from 0.6% growth in the previous quarter, according to the State Secretariat for Economic Affairs. This was the weakest performance in more than a year, after the central bank gave up its cap on the Swiss franc.
The economy expanded by just 0.8% in 2015, after growing by 1.9% in 2014, 1.8% in 2013, 1.1% in 2012, 1.9% in 2011 and 2.9% in 2010, according to the IMF. The Swiss economy has suffered last year mainly due to the franc, which is considered as “significantly overvalued”, despite record low interest rates. The economy is expected to grow by 1% this year and by 1.3% in 2017.
Economic growth was relatively strong from 2004 to 2007, with average annual GDP growth of 3.5%. 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 2.1% in 2009, before returning to positive growth in 2010.
In November 2016, the overall unemployment rate remained unchanged from the previous month, at 3.3%, according to the State Secretariat for Economic Affairs. Unemployment averaged 3% from 2000 to 2015. There were about 149,228 unemployed persons in the country in November 2016, up by 4,697 from the prior month.
The country’s jobless rate is expected to rise slightly to 3.5% this year before returning to 3.4% in 2017, according to the IMF.
Consumer prices are still falling in Switzerland. In October 2016, core deflation stood at 0.26%, a slight improvement from a decline in prices of 0.75% in the same period last year, according to the Swiss Federal Statistical Office. Consumer prices fell by an average of 0.5% from 2012 to 2015.