2022 outlook Real estate prices are rising less sharply

Real estate prices will continue to rise in 2022, but less than in 2021. The risk of a price collapse remains manageable.

by UBS Insights 25 Jan 2022

Demand for residential property was still very high in 2021, while supply remained scarce. Combined with attractive financing terms and the trend toward working from home that will no doubt continue, this led to a 6 percent year-on-year increase in property prices in Q3 2021. This is the strongest growth seen since 2013.

With the key economic indicators for 2022 pointing to green, the risk of a major price slump in Switzerland remains manageable, even if more warning signals are being felt. A further, albeit less pronounced, price increase is expected for 2022: 3 percent for single-family houses, 2 percent for owner-occupied apartments, and 4 percent for vacation homes and luxury properties.

Changing preferences in the population, such as the trend toward working from home, have caused more people to leave cities and move to the countryside, for example to the Rhine Valley or the Lake Constance region. Home offices generally require more space, which is only available at a reasonable price outside city centers. This trend has also made vacation homes more attractive as an additional workplace in the mountains.

For a while, it looked like the city of Zurich might also be affected by urban flight after a stagnation in population growth in Switzerland’s largest city from 2020 to mid-2021. Locals continued to leave the city, but the city’s pull on immigrants and expats provided overcompensation, so that Statistik Stadt Zürich’s November 2021 projections showed unbroken growth, parallel to the development of residential construction activity.

Key interest rates remain stable

The Swiss National Bank’s key interest rate will in all likelihood remain in negative territory in 2022, which means that long-term interest rates will barely move either. In 2021, increased global demand and subsequent supply bottlenecks led to an increase in inflation in Switzerland to 0.6 percent; 1 percent is forecast for this year.

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When it comes to financing residential property, including mortgage renewals, this means for one thing that the money market mortgage, i.e., the mortgage based on the SARON, will remain at a very favorable level. Moderate inflation is exerting slight pressure on the interest rates of fixed-rate mortgages. The additional cost of a long-term fixed-rate mortgage compared with a variable money market mortgage is therefore likely to rise slightly in the coming months. On average over many years, however, the cost of a fixed-rate mortgage remains low.

Better to buy or rent?

The choice between home ownership and renting is based on various factors that must also be weighted based on personal situation or preference. It is not possible to give a general answer as to which is cheaper, as the financial burden depends a great deal on the desired place of residence and income tax.

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Despite the current high real estate prices, home ownership is affordable for the middle class in most municipalities, as this example calculation shows: With a household income of up to 200,000 francs, a home worth up to 1.22 million francs can be purchased with a loan-to-value ratio of 80 percent. For 120 square meters of living space, this corresponds to a price per square meter of about 10,000 francs. In 88 percent of all Swiss municipalities, new owner-occupied apartments do not exceed this price.

However, if you are looking for something in the greater Zurich, Geneva, Basel and Zug areas or in an expensive lakeside and tourist area, you will sometimes need a significantly higher annual income. Incidentally, old buildings and conversions will gain significance on the real estate market as many baby boomers part with their properties in the coming years.

When considering the affordability of home ownership, it is important to look at the total cost of ownership. Anyone buying an old building, for example, should know exactly how much they will have to pay for renovation and conversion work. When buying a property, transaction costs are incurred in addition to the interest costs for the mortgage. Operating and maintenance costs also need to be budgeted, as well as depreciation for future investments. You should also think about the taxation of the imputed rental value and, strictly speaking, of the opportunity costs of the capital invested, which could possibly have been invested more profitably.

Three current guidelines for homeowners

  • Imputed rental value: The debate on the abolition of imputed rental value will continue in the federal parliament this year. If the bill passes, it will bring an end to the taxation of residential property, which was introduced in 1934 by emergency legislation to balance the federal budget. The precise financial consequences will depend on which deductions for homeowners parliament cuts in return. The status of the political discussion at the end of 2021 was that a deduction for private debt interest limited to 70 percent would remain in place. If parliament passes the bill, an appropriate transition period will most likely be included to allow property owners and the cantons to adapt to the new provisions.
  • Energy-efficient renovation: Even though the CO2 Act failed at the ballot box in the summer of 2021, energy-efficient renovation work is a long-running issue and in many cases is worthwhile for three different reasons: Climate-efficient properties actively contribute to maintaining an intact environment for future generations, they reduce energy consumption and thus heating and utility costs, and they often have a higher market value. Whether or not it’s worth replacing an existing oil heating system in individual cases depends on the subsidies available, any taxes due, the energy requirements of the building and the remaining service life of the heating system currently installed. Developments at cantonal or municipal level must also be taken into account. In the canton of Zurich, an amendment to the Energy Act was approved at the ballot box in November 2021: from mid-2022, oil and gas heating systems must be replaced with climate-neutral heating systems at the end of their service life.
  • SARON mortgage: Anyone with a current variable money market mortgage may already be familiar with SARON, the benchmark on which all money market mortgages have been based since the beginning of 2022. LIBOR mortgages are now a thing of the past. The SARON has proven to be a very stable benchmark. At the end of 2021, it stood at –0.71 percent; an interest rate of –0.75 percent is forecast for the end of 2022, and short-term interest rates are not expected to approach the zero mark for about eight years. Consequently, in all likelihood, financing a mortgage based on the SARON will continue to be more favorable than with a long-term fixed-rate mortgage for some time to come. At UBS, clients can choose between the UBS SARON Mortgage and the UBS SARON Flex Mortgage, where extraordinary amortizations are possible free of charge.

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    For anyone who already owns their home, 2022 currently looks like a relatively normal year. If a mortgage is due to expire, it’s worth looking into a money market mortgage. For all those interested in home ownership, 2022 is a year to consider carefully due to continued attractive financing on the one hand and tight supply on the other: you should only consider making a purchase if the offer is entirely convincing.

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