Swiss house prices continue to fall

February 15, 2018

Switzerland house pricesAfter about 15 years of uninterrupted house price rises, the Swiss government’s efforts to cool Switzerland´s overheated property market have finally succeeded.

The nationwide average price of rental apartments fell 1.06% (-1.47% inflation-adjusted) during the year to end-Q3 2017, its seventh consecutive quarter of y-o-y falls, according to the Swiss National Bank (SNB). During the latest quarter, rental apartment prices fell 0.74% q-o-q (-0.44% inflation-adjusted).

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

  • 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)

During the year to Q3 2017:

  • Owner-occupied apartment prices were down by 0.76% (-1.17% inflation-adjusted), after annual rises of 1.46% in Q2 2017, 1.12% in Q1 2017, 1.2% in Q4 2016, and 1.38% in Q3 2016. It was actually the first quarter of y-o-y decline since Q1 2000.
  • Single-family home prices increased by 2.4% (1.98% inflation-adjusted), after y-o-y rises of 2.22% in Q2 2017, 2.42% in Q1 2017, 1.45% in Q4 2016 and 1.36% in Q3 2016. However these price rises were below the average annual price rises of 4.5% between 2009 and 2013.

The property market´s slowdown can be attributed to the Swiss National Bank´s stricter lending criteria, designed to lower housing debt (currently 90% of all household debt). The decision of the central bank to abandon its cap against the euro in 2015 also made Swiss real estate more expensive for foreign investors, thereby reducing demand.

Nationwide house prices started to decline in 2016, when the price of rental apartments fell by 1.3% (-0.8% inflation-adjusted) from a year earlier.

“The main risk in the market for rented residential property is the growing supply overhang. There is a considerable mismatch between robust construction activities and stagnating demand,” said Wüest and Partner.

A surplus of close to 9,000 rented residential properties is expected this year, according to Wüest and Partner.

By region:

  • Lake Geneva recorded the biggest price decline in residential rental apartments, at 5.7% (-5.3% inflation-adjusted) in 2016. It was the second consecutive year of annual price declines and the highest in two decades.
  • Zurich had a house price decline of 2.5% (-2% inflation-adjusted) in 2016, after a y-o-y decline of 0.2% in 2015 and an annual growth of 3.4% from 2000 to 2013.
  • Southern Switzerland had a house price decline of 2.2% (-1.8% inflation-adjusted) in 2016.
  • Central Switzerland saw a house price fall of 1.9% (-1.5% inflation-adjusted) over the same period.
  • Eastern Switzerland had a house price fall of 1.5% (-1% inflation-adjusted).
  • Northwestern Switzerland had a house price drop of 0.5% (-0.1% inflation-adjusted).
  • Western Switzerland recorded an annual house price increase of just 1% (1.4% inflation-adjusted).
  • Berne’s house prices were unchanged in 2016 from a year earlier (0.4% increase when adjusted for inflation).

Switzerland’s economy remains sluggish, mainly due to weak investments and a decline in exports. In Q2 2017, the economy expanded by a meagre 0.3% from the same period last year, the lowest growth rate since Q4 2009, according to the State Secretariat for Economic Affairs. Quarter-on-quarter, the economy grew by just 0.3% in Q2 2017. The economy is expected to grow by 1% this year and by 1.3% in 2018, based on IMF estimates.

Local house price variations

Switzerland real estate price indices

Zurich had the most expensive owner-occupied apartments and single-family homes during Q2 2017.

For owner-occupied apartments:

  • In Zurich, the median asking price was CHF 11,800 (€10,096) per sq. m.
  • In Geneva, the median asking price was CHF 11,530 (€9,865) per sq. m.
  • In Lausanne, the median asking price was CHF 9,260 (€7,923) per sq. m.
  • In Basel, the median asking price was CHF 8,550 (€7,316) per sq. m.
  • In Berne, the median asking price was CHF 6,880 (€5,887) per sq. m.

For single-family homes:

  • In Zurich, the median asking price was CHF 1.64 million (€1.4 million)
  • In Geneva, the median asking price was CHF 1.4 million (€1.19 million)
  • In Lausanne, the median asking price was CHF 1.3 million (€1.12 million)
  • In Basel, the median asking price was CHF 1.22 million (€1.05 million)
  • In Berne, the median asking price was CHF 1.09 million (€934,615)

Mortgage interest rates are amazingly low

In September 2017, average interest rates for newly drawn mortgage loans were:

  • Variable: 2.62%, slightly down from 2.64% a year ago
  • Fixed with up to 1 year maturities: 1.08%, down from 1.13% a year ago
  • Fixed with up to 3 years maturities: 1.1%, slightly down from 1.11% a year ago
  • Fixed with up to 5 years maturities: 1.2%, slightly up from 1.18% a year ago
  • Fixed with up to 7 years maturities: 1.39%, up from 1.32% a year ago
  • Fixed to 10 years: 1.66%, up from 1.52% a year ago

Switzerland mortgage rates

Despite the low interest rates, housing loans have increased only modestly over the past few years mainly because of the Federal Council’s imposition of a countercyclical capital buffer (CCB) in February 2013.  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%.

In 2014 mortgage rates fell because the central bank’s key rate was cut to a range of -0.75% to 0.25% in December 2014, as a result of SNB’s attempt to contain Swiss franc appreciation.

Swiss lenders are generally conservative. Borrowers must produce down payments of 20% to 5% of 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.

Mortgage market remains highly leveraged

The size of Switzerland´s mortgage market was around 145% of GDP in 2016, 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

Foreigners are settling in Switzerland in large numbers

Switzerland has one of world’s largest number of permanent immigrants per capita in 2016, at almost 25% of the total population, according to the State Secretariat for Migration(SEM). This is significantly affecting house price movements. However net migration was just 60,262 in 2016, down from 71,468 in the previous year and  the lowest level in almost a decade.

Switzerland foreign resident population

Europeans accounted for almost 87% of the permanent foreign resident population.  Zurich has the highest number of permanent foreign residents at 19% in 2016, followed by the canton of Vaud (12.8%), Geneva (8.5%), and the canton of Argovia (7.9%).

Switzerland net migration rate

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.

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.

Residential rents falling, amidst growing supply overhang

In Q2 2017, asking rents for apartments fell slightly by 0.5% from a year earlier

  • In Geneva, the median asking rent was CHF 360 (€308) per sq. m. per year .  Geneva´s average rent in prime areas was CHF 630 (€539) per sq. m. per year
  • In Zurich, the median asking rent was CHF 320 (€274) per sq. m. per year.  Zurich´s average rent in prime areas was CHF 660 (€565) per sq. m. per year
  • In Lausanne, the median asking rent was CHF 280 (€240) per sq. m. every year Lausanne´ average rent in prime areas was CHF 460 (€394) per sq. m.
  • In Basel, the median asking rent was CHF 230 (€197) per sq. m. per year.  Basel´s average rent in prime areas was CHF 400 (€342) per sq. m.
  • In Berne, the median asking rent was CHF 230 (€197) per sq. m. per year.  Berne´s average rent in prime areas was CHF 400 (€342) per sq. m. per year

The vacancy rate for rental apartments increased slightly to 2% in 2016, from 1.8% in the previous year.

While the number of rental apartments on offer has increased, demand has weakened in recent years, partly due to slower population growth. In 2017, population growth is projected to fall below 1% for the first time in a decade, amidst a decline in net inward migration of foreign residents in the past two years.

Rental yields are low.

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. This is supported by the recent report by Wüest and Partner, which showed that prime rental yields range from just 1.7% to 2.5% in Q2 2017.

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.

Pro-tenant laws

Switzerland has one of the lowest owner-occupancy rates in Europe. 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.

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%.

Swiss franc depreciates at last, easing pressure on exporters

Switzerland monthly exchange rate

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, putting pressure on exports. 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.

However, as confidence for the European single currency improves following the election of Emanuel Macron in France, and the resolution of problems at banks in Spain and Italy, demand for safe assets such as the Swiss franc has been weakening.

As such, the franc depreciated against the euro by 5.7% in the past 12 months, with an average monthly exchange rate of CHF1.1542 = EUR 1 in October 2017, the lowest level for almost 3 years, according to the Swiss National Bank.

Sluggish economic growth

Switzerland gdp inflation

Switzerland’s economy remains sluggish, amidst weaker investments and a decline in exports. In Q2 2017, the economy expanded by a meagre 0.3% from the same period last year, down from annual growth rates of 0.6% in both Q4 2016 and Q1 2017, 1.5% in Q3 2016 and 2% in Q2 2016 and the the lowest growth rate since Q4 2009, according to the State Secretariat for Economic Affairs.

Quarter-on-quarter, the economy grew by just 0.3% in Q2 2017, a slight improvement from the previous quarter’s 0.1% growth.

In 2016, the economy expanded by 1.4%, after growing by 1.2% in 2015, 2.5% in 2014, 1.9% in 2013, and 1% in 2012, according to the IMF. The Swiss economy has suffered in recent years mainly due to the franc, which is considered as “significantly overvalued”, despite record low interest rates. However, prospects in the export sector is now improving, given the recent weakening of the franc and the stronger growth in the euro area.

Switzerland core inflation

The economy is expected to grow by 1% this year and by 1.3% in 2018, based on IMF estimates.

In October 2017, unemployment stood at 3%, unchanged in the past five months but lower than the previous year’s 3.2%, according to the State Secretariat for Economic Affairs.

Consumer prices are now gradually rising in Switzerland. In September 2017, core deflation stood at 0.51%, according to the Swiss Federal Statistical Office. Consumer prices fell by an average of 0.4% from 2012 to 2016.

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