Investors interested in Switzerland's residential real estate should consider these 6 trends in the buyers' and renters' markets.
1. Owning will continue to be cheaper than renting
The cost of owning your home in Switzerland (interest costs, maintenance and provisions) is currently around 15% lower than the cost of renting a comparable property. With loan-to-value (LTV) at 80% (loan to value represents ratio of mortgage to property value, for example, a CHF 800,000 mortgage on a CHF 1,000,000 valued house, has an LTV of 80%), the resulting savings leverage up to a return on equity (the remaining CHF 200,000 in our example) of over 4%, an unprecedented situation, at least in the current real estate cycle.
For comparison, ten years ago the cost of owning a home exceeded the cost of renting by 40% –home ownership had become very popular, and home buyers were looking for property values to increase. In fact, purchase prices had to increase at least 2% each year to offset the additional cost of ownership compared to renting, and they did.
While the current situation is different, ownership savings will provide a buffer against market correction: even if prices fell 0.5% a year, home buyers would still be ahead financially. In 2018 we expect this buffer to remain – home owner costs will remain low, home construction should remain at last year's level, which is 15-20% lower than in 2014, and we expect single-family home prices to increase slightly.
2. Condominiums will lose ground to single family homes
In the past 20 years, condominium prices have risen faster than those for single-family homes. Adjusted for inflation, condominium prices increased an average of 2.4% a year, while single-family homes climbed just 1.9%. Much of this difference can be attributed to three factors: size, location, and rentability.
The average single-family home has around 170 sq. meters of living space and a purchase price of over CHF 1 million, limiting the pool of possible buyers to 20% of all households, and shifting demand towards condominiums. Single-family homes also tend to be located in less attractive city locations, with only a fifth found in prime locations, compared to a quarter of condominiums. Finally, condominiums, such as small and medium-sized apartments in urban centers and metropolitan areas, make interesting investment vehicles for small investors. The option to switch between living in the property or renting it out goes some way to justifying the premium on condominiums over single family homes.
However, in 2018 condominium prices will likely stagnate as they face downward pressure from declining rents. Because absolute purchase prices will continue to limit financial ability, buyers will be driven to smaller apartments or those with a lower specification.
3. Densification will impact supply of single-family homes
Switzerland's new Spatial Planning Act aims to densify the undeveloped oases in built-up areas, and the "unused development rights" that arise when the actual built floor space is less than the legally permitted floor space. The Act gives precedence to the use of infill housing in developed rural and metropolitan areas over the increase in floor area ratios. This will make new single-family home construction difficult, possibly reducing the additional supply of single-family homes in the future.
However densification is not always necessary. Except for the greater Zurich area, virtually every Swiss region, including Geneva and Basel, has enough undeveloped properly zoned land to absorb the next decade of population growth without densifying.
4. Aging demographics will limit demand for single-family homes
From now until 2030, because of aging demographics, the main buyer group of large residential units is expected to grow at just half the rate of the overall Swiss population. Demand for single-family homes is expected to shrink in the mountainous cantons of Central Switzerland, Appenzell Innerrhoden and Grisons, with even the reduced supply of large residential properties unlikely to turn the price tide in the medium to long term.
Said differently, single-family home prices, which have outperformed condominium prices since 2014, are probably about to reach the end of their rally. Fierce competition and relatively high transparency in the home market will prevent prices in both segments from decoupling, and we expect them to generally track each other closely over the long term.
Parallel long-term price behavior in the two market segments
Inflation-adjusted asking prices (index 2000=100) and cumulative difference in price change rates between condominiums and single-family homes (in percentage points)
5. Vacancy rates in the rental market will climb to all-time highs
As of mid-2017, 2.4% of all rental apartments were vacant. The last time the rate was so high was in 1998, when 2.8% of rental apartments stood empty.
The issue is that while construction numbers remain stable, additional demand for rental properties has dropped. This year net immigration into Switzerland is expected to be around 60,000 people. To give this number a perspective, this means that in 2018, 10,000 fewer apartments will be needed compared to how many were required in 2013.
The fall in immigration is due to fewer arrivals from the EU. In the past four years net immigration from Europe has shrunk from 75% to 60% of total immigration, as economic recovery in the Eurozone, especially on the Iberian Peninsula, has drastically reduced net immigration. A weak Swiss labor market contributed to the decline.
If these construction and population trends continue, vacancy rates will likely reach record highs by 2019 at the latest.
6. Rents will decline at an accelerated pace
In extremely tight housing markets, rents for new and renewed leases tend to respond very quickly to changes in the vacancy rate. If vacancies rise, rents tend to fall quickly. For example, rents in the Lake Geneva region have fallen 9% since 2015, even though the current vacancy rate for rental apartments, at 0.8%, is only one-third that of the Swiss average.
Because persistently high vacancy rates puts pressure on rents, we expect asking rents to correct around 2% this year. And the correction won't end there. Unless construction activity changes direction or immigration rises again, asking rates will likely remain some 10% lower in 2020 than they were in 2015.
For full coverage of the residential, commercial, and listed property markets in Switzerland, download the 2018 edition of our annual Real Estate Focus report.