Switzerland´s housing cycle appears to be peaking. Switzerland’s economic growth is weak, and the government is trying to cool the overheated property market - with success:
- Owner-occupied apartment prices were up by only 1.63% (2.98% inflation-adjusted) in 2015, far from the average growth of 5.4% from 2009 to 2012, according to the Swiss National Bank (SNB).
- Single-family home prices increased by 2.29% (3.65% inflation-adjusted) in 2015, after rises of 0.42% in 2014, 4.6% in 2013, 3.6% in 2012, 3.8% in 2011, and 4.2% in 2010.
Rental apartments´ average prices rose a meagre 0.04% (1.37% inflation-adjusted), according to the SNB:
- Old rental apartments gained 0.54% (1.87% inflation-adjusted) during 2015
- New rental apartment prices dropped by 2.69% (-1.4% inflation-adjusted).
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.
- Northwestern Switzerland recorded the biggest price gain in owner-occupied apartments, at 4.92% (6.07% inflation-adjusted)
- Eastern Switzerland had a house price increase of 3.1% (4.23% inflation-adjusted)
- Central Switzerland had a house price increase of 2.94% (4.07% inflation-adjusted)
- Western Switzerland had a house price increase of 1.43% (2.55% inflation-adjusted)
- Southern Switzerland recorded an annual house price increase of just 0.72% (1.82% inflation-adjusted)
In 2015, the Zurich area saw annual house price rises of 3.43% (4.56% inflation-adjusted) while Berne area house prices rose 3.95% (5.09% inflation-adjusted). In contrast, prices in the Lake Geneva area fell by 3.13% (-2.07% inflation-adjusted).
Swiss property prices are expected to hold steady in 2016, according local property experts. The economy is expected to grow by 1.3% this year, after the central bank gave up its cap on the Swiss franc last year. The economy expanded by just 1% 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).
Real estate bubble risks continues
Despite the recent slowdown, the property market´s "bubble risk" intensified in the last quarter of 2015, rising by 5.22% from the previous quarter, to reach 1.41, according the UBS Swiss Real Estate Bubble Index. This is the highest "bubble risk" level in 15 years.
The Lake Geneva and the Greater Zurich areas continue to be the most exposed regions in Switzerland, followed by Zug, Lucerne, Basel, Lausanne and Lugano.
The UBS Swiss Real Estate Bubble Index tracks the relationships between the following sub-indicators – house prices vs. rents, house prices vs. household income, house prices vs. inflation, mortgage debt vs. income, construction vs. GDP, and proportion of credit applications for residential property not intended for owner occupancy. “The highest price rises for homes shifted last year from the centre of the country to the periphery,” according to the UBS report.
“Prices have reached such high levels in certain geographic areas and market segments that households simply could no longer afford them,” said Dominik Matter of Fahrländer Partner.
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 November 2015 average mortgage loan rates were:
- Fixed: 1.49%, from 1.53% a year ago
- Up to 1 year maturities: 1.44%, from 1.46% a year ago
- Up to 3 year maturities: 1.36%, from 1.46% a year ago
- Up to 7 years: 1.44%, from 1.52% a year ago
- Up to 10 years: 1.76%, from 1.87% a year ago
- Over 10 years: 1.8%, from 1.95% a year ago
However variable mortgage rates were slightly higher than last year, ranging from 1.16% (linked to a base rate) to 2.88% (not linked to a base rate), according to SNB.
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 January 2016, the key rate ranged from -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 2014, 91% 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.
Outstanding mortgage loans amounted to about CHF 931.4 billion (€857.5 billion) in December 2015, up by about 3% from the same period last year, and up by 109% 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.
By end-2015, around 1.99 million foreign nationals are residing permanently in Switzerland. Europeans account 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 (313,725), followed by Germans (301,548), Portuguese (268,067), and French (123,050).
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.
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.
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 3.18% to 3.81%. 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 3.22%, according to the Global Property Guide research of August 2014.
Rents increased by an average of 0.5% in 2015 from the previous year, according to real estate firm Wüest and Partner.
The rental market is expected to slow this year, amidst weakening demand and rising supply. Rents are projected to slightly drop by 0.3% this year, the first time in 10 years, based on the prediction of 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 greater 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.
Exchange rate cap abolished
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.
In January 2016, the average monthly exchange rate stood at CHF1.0932 = EUR 1 and CHF1.0054 = USD 1, according to the Swiss National Bank.
Sluggish economic growth
Switzerland’s economy unexpectedly stagnated in Q3 2015 from the previous quarter, after a minimal growth of 0.2% in Q2 2015 and a contraction of 0.3% in Q1 2015, mainly due to weak performance in the energy, construction and financial sectors, based on figures from the State Secretariat for Economic Affairs.
The economy was estimated to have expanded by just 1% 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. Economic growth is projected at about 1.3% this year.
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 2015, the overall unemployment rate stood at about 3.4%, up from 3.2% both in 2013 and 2014, according to the IMF. The country’s jobless rate is expected to rise slightly to 3.6% this year before returning to 3.4% in 2017.
Consumer prices are still falling in Switzerland. In January 2016, core deflation stood at 0.89% down from annual inflation of 0.37% 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.