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Sancho Panza

Swiss house prices take a dip in the fondue

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Cheap rents and falling house prices.What's not to like?

 

Global Property Guide 22/12/16

'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.

By region:

  • 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).

 

 

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.

Switzerland real estate price indices

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 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.

Switzerland mortgage loans

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 net migration rate

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

Switzerland owner occupied dwellings

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.

By region:

  • 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

 

Pro-tenant laws

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.'

 

 

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Out of interest, do you know if house ownership is out of reach of most people? My sister in-law (from the UK) lives over there with her Swiss husband and they've always rented apartments. When we ask about buying, they say that's only for rich people. I get the feeling this is a bit of social conditioning, a bit like we have here in the UK about buying but in reverse.

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5 minutes ago, LivingWithTheInlaws said:

Out of interest, do you know if house ownership is out of reach of most people? My sister in-law (from the UK) lives over there with her Swiss husband and they've always rented apartments. When we ask about buying, they say that's only for rich people. I get the feeling this is a bit of social conditioning, a bit like we have here in the UK about buying but in reverse.

My Swiss mate tell me as such and it's heavily regulated.

She hasn't lived there for decades and has no plan on returning.

So probably not social conditioning, just acceptance of the norm.

Renting is just the way it is and attitude about property is very different, similar to most of Scandinavia I suppose.

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The fact that they saw themselves outside of the house buying group I think says a lot about the lack of aspiration they have in their society compared to the UK. The husband is actually a baker by profession, although these days that's more of an industrial process and he's some sort of supervisor, but it seems that people know their place and are more content with it. Going to Switzerland reminds of Britain in the 70s. The retail is all old fashioned and tends to close at the weekends, even the 'convenience' stores. No out of town retail parks open all hours.

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16 hours ago, Sancho Panza said:

Cheap rents and falling house prices.What's not to like?

[..]

Pro-tenant laws

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.'

 

 

First, rents are nothing like 'cheap' in Switzerland nor are house prices, even if they are starting to fall a little.  It has been incredibly hard to find a decent, 'value for money' rental property in Zuerich or Geneva areas for most of a decade.

You can offset your mortgage interest against taxes so people typically take out an IO mortgage and then offset the payments against their taxes.  A 30% deposit is usual for the mortgage, though.  You can put quite a bit of your income into a tax-free 'Pillar 3A' savings vehicle that is intended for pensions but also can be used to purchase property so you'd be saving into that with the intention of paying off the mortgage capital 20-25 years down the line.

Tenant laws are pretty good but it cuts both ways - usually there is 3 months notice to vacate required by the tenant and in many places, this can only be exercised on two specified occasions per year.

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