Adjusted for inflation, the price of residential property is at the same level today as at the height of the last real estate bubble at the start of the 1990s. The UBS Swiss Real Estate Bubble Index, which measures imbalances in the owner-occupied housing market, rose again last year, and settled in the risk zone. Yet after 16 years of sometimes sharply rising residential property prices, credit restrictions seem to be taking effect on a broad scale. Last year, nominal offer prices for owner-occupied apartments increased by just 1.5 percent, and for single-family homes by 2 percent. Due to stagnating incomes and increasing numbers of empty properties, prices should stabilize this year – and for owner-occupied apartments, we even forecast a slight fall of 1 percent.
Since 2008, buying residential property has been much more affordable thanks to falling mortgage interest rates. Annual occupancy costs have since dropped by an average of 20 percent. Since the middle of 2014, the running costs of residential property have fallen below the rental costs of a comparable property – for the first time in 15 years. The number of households wanting to buy residential property has risen accordingly.
And yet it is more and more difficult to get the necessary financing. To avoid creating a credit bubble, banks have to stick to affordability and other regulatory guidelines when issuing mortgages, such as the amount of hard equity paid in, and amortization obligations. As a result, and since income has scarcely risen at all compared to residential property prices, the circle of potential buyers has grown smaller. In 2008, half the households in Switzerland met the income conditions to qualify for 80-percent financing of the purchase price of a 120 square meter new-build apartment. Today, only a quarter of households do so.
Average households are increasingly turning away from expensive regions to places with affordable real estate. This is why prices for homes in Eastern Switzerland and the central region increased the most last year. While a new 120 square meter single-family home in the canton of Zurich is now only affordable for around 25 percent of all Zurich households, a similar property in the canton of Thurgau would be within the budget of 65 percent of Zurich households.
High-price segment under pressure
Another result of the credit constraints is to put pressure on prices in the high-price segment. Since 2008, the number of apartments available in Switzerland with prices of over 10,000 francs per square meter has tripled, whereas demand has mostly stagnated. In the canton of Geneva for example, more than half of all the real estate put up for sale last year cost over 10,000 francs per square meter. And yet just a quarter of Genevan households can afford a 120 square meter home in this price bracket. Offer prices in the area around Lake Geneva have been falling for the past three years. Similar effects can be seen in many premium locations in German-speaking Switzerland. Prices fell considerably in 2015 in many of the most expensive municipalities on Lake Zurich and Lake Zug.
Racing to catch up in (still) inexpensive cities
In many previously inexpensive locations there’s a race to catch up. Condominium ownership has become more expensive in many cities. In several, such as Aarau and Fribourg, price increases have even hit double-digit percentage figures. The city of Basel, where prices shot up by 7.5 percent, enjoyed positive economic growth and relatively low prices compared with other major economic centers. In Bern and most medium-sized cities in the central region, owner-occupied apartments still rose by an average 2 to 3 percent. Due to lower occupancy costs, buying in these locations is sometimes much cheaper than renting. On the other hand, the occupancy costs of residential property in Zurich, Lausanne and Geneva are just as high or higher than the rental costs of an equivalent apartment.
What’s ahead in 2016?
We expect sluggish economic growth this year, with slightly positive per capita economic performance. Construction is leveling off at a high level, whereas demand for living space is falling. There is a lot of evidence to suggest that mortgage interest, and hence the occupancy costs of residential property, will remain very low. The central banks will determine the level of development over the next few years. However, it is unlikely that the Swiss National Bank will increase the base rate before 2017.