Switzerland’s housing market remains steady

Switzerland’s housing market remains more or less steady, despite rapidly rising interest rates, rising construction costs, and a slowing economy.

The nationwide price index for privately owned apartments rose by a modest 3.9% in Q1 2023 from a year earlier, following y-o-y increases of 3.63% in Q4 2022, 2.73% in Q3, 1.88% in Q2 and 1.4% in Q1, according to figures from the Swiss National Bank (SNB). However, when adjusted for inflation, prices were up by a minuscule 0.68% over the same period.

Switzerland’s house price annual change

Quarter-on-quarter, apartment prices increased by 0.75% in Q1 2023 but actually declined by 0.25% in real terms.

By region:

• In Lake Geneva, the average transaction price of privately-owned apartments rose by 1.6% in Q1 2023 from a year earlier but declined slightly by 0.1% from the previous quarter.
• Zurich saw a y-o-y price increase in privately-owned apartments of 4.4% in Q1 2023. Quarter-on-quarter, prices increased by a meager 0.2%.
• Central Switzerland recorded the biggest y-o-y price increase in privately-owned apartments, at 6.5%. On a quarterly basis, apartment prices were up by 2.4%.
• Southern Switzerland had a price increase of 6.3% in Q1 2023 from a year earlier, and 1.4% from the previous quarter.
• Eastern Switzerland’s apartment prices were more or less steady, recording an increase of 1.1% y-o-y and a slight decline of 0.1% q-o-q.
• In Northwestern Switzerland, prices for privately-owned apartments increased by 1.6% in Q1 2023 from a year earlier and by 0.3% from the previous quarter.
• Western Switzerland had a price growth of 1.8% when compared to a year ago, and 0.5% from the previous quarter.
• Berne’s apartment prices rose by 1.8% y-o-y in Q1 2023 but declined slightly by 0.1% q-o-q.

 Switzerland’s housing market saw strong house price increases from 2000 to 2016:

• 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)

 Residential property growth slowed dramatically from 2017 to the first half of 2020. Surprisingly, the Swiss housing market remained healthy during the Covid-19 pandemic, with residential property prices rising robustly from the second half of 2020 to Q1 2023.

The Swiss housing market is expected to remain stable during the remainder of the year, with marginal price increases for both apartments and single-family homes. However, low rental yields and strict foreign homeownership rules in the country are discouraging some foreign investors.

In Geneva, rental apartments yield from just 1.9% to 2.3%, according to Global Property Guide research conducted in November 2022. Likewise in Zurich, gross rental yields for apartments stood at an average of 2.8%, down from about 3.3% three years ago. Wüest and Partner’s Q4 2022 figures are even lower, with prime rental yields averaging just 1.25%, down from 1.4% to 1.9% two years ago and from 1.7% to 2.3% three years ago.

Foreign property purchases are also severely restricted. The Swiss have for a long time restricted the sale of property to foreigners, with an annual quota of permits set by the Federal Government given to non-resident foreigners seeking to acquire property in Switzerland.

Switzerland’s economy expanded by 3.5% in 2021 and by another 2% in 2022, following a 2.9% contraction in 2020, thanks to the Swiss government’s introduction of an economic stimulus package worth CHF 65 billion (€ 66.95 billion) - the biggest in the country’s history. However, economic growth is slowing sharply again. In Q1 2023, the economy expanded by a meager 0.6% from a year earlier, amidst the ongoing Russian war in Ukraine, supply chain bottlenecks, and heightened inflationary pressure worldwide. As a result, the State Secretariat for Economic Affairs (SECO) projects the Swiss economy to grow significantly below average at 1.1% this year and 1.5% in 2024.

Local house price variations

Geneva has Switzerland’s most expensive owner-occupied apartments while Zurich has the priciest single-family homes.

During 2022:

• In Geneva, the average transaction price of owner-occupied apartments was CHF 19,460 (€20,044) per sq. m., up by 3% from a year earlier, based on figures from Wüest and Partner.
• In Zurich, the average price was CHF 19,210 (€19,786) per sq. m., sharply up by 12.5% from the previous year.
• In Lausanne, the average price was CHF 14,820 (€15,264) per sq. m., up by 9.1% from a year earlier.
• In Basel, the average price was CHF 12,400 (€12,772) per sq. m., up 54.6% from a year ago.
• In Berne, the average price stood at CHF 10,680 (€11,000) per sq. m., up by a modest 4.4% from a year earlier.

For single-family homes:

• In Zurich, the average transaction price for single-family homes surged by a huge 22% y-o-y to CHF 4.08 million (€4.2 million) during 2022.
• In Geneva, the average price was CHF 3.31 million (€3.41 million), up by 7.3% from a year ago.
• In Lausanne, the average transaction price stood at CHF 2.65 million (€2.73 million), sharply up by 18.1% from a year earlier.
• In Basel, the average price was CHF 2.67 million (€2.75 million), up by 8.6% from a year earlier.
• In Berne, the transaction price was CHF 2.21 million (€2.28 million), up by 6.6% from the previous year.

Mortgage rates are now rising rapidly, following key interest rates hikes

In its June 2023 meeting, the SNB raised its policy rate by 25 basis points to 1.75% and signaled the possibility of further rate increases in the future to rein in inflationary pressures. The central bank’s latest move was the fifth straight rate hike since the beginning of its tightening cycle last year. Borrowing costs are now at their highest level in more than two decades. 

“It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term,” said the SNB. “To provide appropriate monetary conditions, the SNB also remains willing to be active in the foreign exchange market as necessary. In the current environment, the focus is on selling foreign currency,” the central bank added.

As a result, mortgage rates are also rising rapidly. In May 2023:

• Variable: 2.84%, up from 2.63% a year ago and 2.64% two years earlier
• Fixed with up to 1 year maturity: 2.9%, sharply up from 1.23% a year earlier and 1.01% two years ago
• Fixed with up to 3 years maturity: 2.89%, sharply up from 1.7% in the previous year and 1.04% two years ago
• Fixed with up to 5 years maturity: 2.92%, far higher than the 1.99% in May 2022 and 1.09% in May 2021
• Fixed with up to 7 years maturity: 2.97%, up from 2.26% a year ago and 1.19% two years earlier
• Fixed to 10 years: 3.06%, sharply up from 2.5% in the previous year and 1.37% two years ago

Despite the sharp increase in mortgage interest rates, they remain very low by international standards, as well as from a long-term perspective.

“From a long-term perspective, mortgage rates remain relatively low, despite the increase in recent months. So far, demand for mortgage loans does not appear to have been affected by the higher interest rates,” said the SNB in its Q1 2023 Quarterly Bulletin. “However, there has been increased demand for mortgage loans with relatively short maturities.”

Yet housing loan volumes have increased only modestly in recent years, because of the Federal Council’s imposition of a countercyclical capital buffer (CCyB) for residential real estate in February 2013, as part of SNB’s attempt to contain the appreciation of the Swiss franc. However, in March 2020, the requirement was removed to mitigate the economic impact of the Covid-19 pandemic. Then on January 26, 2022, the capital buffer targeted at mortgage loan financing residential real estate was reactivated, where it remained since.

“The Swiss sectoral CCyB targeted at mortgage loans financing residential property located in Switzerland remains at 2.5% as decided and communicated by the Federal Council in January 2022,” said the SNB. “The Swiss authorities will continue to monitor the developments in the mortgage and real estate markets closely and examine whether further measures are necessary to contain the risks for financial stability.”

Swiss lenders are generally conservative. Borrowers must produce down payments of 5% to 20% of the loan value. In fact, about 90% of all bank mortgages have loan-to-value (LTV) ratios of less than two-thirds of the property value.

The mortgage market remains highly leveraged

The size of Switzerland’s mortgage market was around 152% of GDP last year, far higher than the 119% of GDP in 2010, 94% of GDP in 2000, and just 60% of GDP in 1990.

In April 2023, the total amount of mortgage loans outstanding rose by 3.1% to more than CHF 1.18 trillion (€1.22 trillion) from the same period last year, according to the SNB. Over the same period:

• Domestic: mortgage loans rose by 3.2% y-o-y to CHF 1.17 trillion (€ 1.2 billion)
• Foreign: mortgage loans increased 2.4% y-o-y to CHF 14.8 billion (€15.2 billion)

Mortgage loans grew by an annual average of 3.7% in the past decade.

Immigrants boost the housing market

Switzerland has one of the world’s largest numbers of permanent immigrants per capita, at almost 26% of the population, according to the State Secretariat for Migration (SEM). This significantly affects house price movements.

In 2022, the total number of permanent foreign residents rose by 2.4% from a year earlier, to 2,241,854 people – the highest ever recorded. As of May 2023, permanent foreign residents in Switzerland stood at 2,272,764 people.

Zurich has the highest number of permanent foreign residents at 19.1% of the total, followed by the canton of Vaud (12.2%), Geneva (8.3%), the canton of Argovia (8.2%), and Berne (7.7%). Europeans accounted for almost 85% of the permanent foreign resident population in Switzerland last year, at 1,897,814 people.