Analyse

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The property market’s current state is strikingly unconventional. Typically we might expect property prices to decline but instead, they are holding firm or even rising in places. This anomaly is driven by underlying dynamics that appear poised to persist.

One would assume that the Swiss National Bank’s decision to raise interest rates would act as a damper on property prices by increasing the cost of financing. Instead, between the summers of 2022 and 2023, the prices of apartments sold under commonhold arrangements increased by 3.4%, while single-family house prices rose by 1.2%.

Two primary factors contribute to this market paradox. Firstly, the residential sector maintains an exceptionally low vacancy rate. For instance, in June, it stood at 0.98% in the canton of Vaud and was as low as 0.45% in the city of Bern. Secondly, there has been a real shortage of new constructions, especially in highly sought-after areas. In recent months, Switzerland has issued just 10,000 building permits, with nearly 6,000 allocated to single-family houses. The limited supply of properties entering the market is fuelling demand and, consequently, supporting price levels. It is also worth noting that rising interest rates have led to higher rents, which have somewhat alleviated the downward pressure on property prices.

Raising rents at your peril

A deeper understanding of this phenomenon requires us to acknowledge that the uptick in interest rates has elevated the reference rate for leases. This rate’s calculation based on mortgages concluded in Switzerland, has been at 1.5% since 1 June, marking a 0.25% increase. Additionally, as rents are influenced by inflation, it is probable that rent hikes will persist. 

While landlords do have the leeway to increase rents (by up to 40% of CPI), they must tread cautiously to avoid reaching levels that are indefensible or unsustainable for tenants. Rent rates for newly constructed homes are already high, meaning that landlords are reportedly having trouble filling them. Ultimately, supply and demand dynamics will dictate rent levels, and a shift may occur if property prices decrease or developers reduce their profit margins.

Curiously, from a financial perspective, renting has now become a more attractive option than owning property. Factoring in mortgage arrangement costs, property maintenance expenses, the cost of debt and the returns on the invested capital, it is cheaper to rent a 100 m2 flat than to own it outright. This marks a departure from previous years when historically low mortgage rates made ownership financially advantageous. This shift is likely to persist unless interest rates see a substantial decline.

A long-term play

Evaluating immediate ownership costs versus renting represents only a part of the equation. Over the long term, property ownership typically offers appreciation in asset values. In Switzerland, residential property values are estimated to double every 30 years. Investment properties, however, present a somewhat different picture. With many properties struggling to find buyers, prices are experiencing a modest decline. 

In the investment property market, the focus is shifting from selling price to yield – the return expected by the owner through rental income. Sellers are still hoping to secure prices that buyers are unwilling to pay, especially amidst rising interest rates. No one wants to pay 3% interest for a gross yield of only 3%, which means an even lower net return after expenses and taxes.

Transaction volumes in Switzerland have plummeted by an estimated 20-25% compared to the two-year average. Consequently, supply currently outweighs demand. Nevertheless, prices are not experiencing a substantial freefall. This can be attributed to the fact that financial considerations are not the sole determinants in property acquisition. Emotional factors, such as the desire to own one’s own home, continue to sway the investment process. 

Benchmark mortgage rate over the past 15 years

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