Image: UBS

The introduction of negative interest rates in 2015 has channeled a lot of capital into the real estate market. Since then, interest rates on Swiss government bonds have been negative for all available maturities. This makes borrowing even cheaper, skews the difference in cost between owner-occupied and rental housing, and significantly increases the attractiveness of investment properties compared with investing in bonds. In the last five years, a surplus of 30,000 units has been built as a result. Prices for top residential properties in the major cities shot up by 40 to 60 percent. And a third of all units designed as condominiums were used as capital investments, whether being rented out or used as a second residence.

In view of skyrocketing European-wide national debt and the massive quantitative easing by the central banks, an end to negative interest rate policy in Switzerland and Europe is unlikely in the foreseeable future. Based on the experience of the last five years, the following can be concluded about the Swiss real estate market:

Homes have become an investment

Overall, lower financing costs significantly increased the cost advantages of condominiums over renting. At current purchasing prices, rents and interest rates, annual housing costs for a new owner are about 15 percent lower than for someone renting an equivalent apartment. At a loan-to-value ratio of two-thirds, the return on equity for a self-occupied property is an impressive 4 to 5 percent. This is particularly attractive in view of increased uncertainty about retirement provision. Negative interest rates have contributed to the fact that homes are seen more as an asset and less as a consumer good.

Many households have bought residential property as an investment. Currently, one in six apartments sold is rented out as a condominium, which is about 50 percent more than ten years ago. Negative interest rates make even low rental yields appear attractive. At the same time, since 2014 many condominiums have been used as second homes – the majority in metropolitan centers. Thanks to negative interest rates and the investment crisis, many buyers believe price adjustments are unlikely and are counting on long-term gains.

Vacancy is part of the game

Low interest rates have encouraged a sharp rise in vacancy rates for rental housing. Although the introduction of negative rates had no direct impact on construction activity, the number of building permits changed only slightly between 2012 and 2017. In purely mathematical terms, the increase in vacant apartments can be explained largely by the decline in population growth. Low interest rates have kept construction activity high, preventing supply from adjusting to lower demand. In addition, the search for regular positive returns encourages investors to focus on rental rather than owner-occupied apartments. Currently, around 60 percent of all building applications are for rentals, compared with 50 percent in 2012.

However, the Swiss average vacancy rate is likely to peak soon. Depreciation on the value of a building and the mortgage obligations mean owners cannot wait forever to sell. Despite negative interest rates, construction activity has been flat for several quarters and construction cranes have shifted to regions with low vacancy rates. Despite this, the number of empty apartments is not expected to fall to pre-2015 levels, even in the long term. This is because the lower the cost of capital, the longer it could take until full occupancy levels are reached.

House prices continue to rise unchecked

On average, house prices rose 0.6 percent in the second quarter of 2020, making them 2.7 percent higher than a year ago. Adjusted for inflation, the price increase of 4 percent was the strongest since 2013. On the other hand, the prices of homes in the upscale segment came under pressure, falling by almost 2 percent compared with the previous quarter. Transaction activity also declined significantly.