The Swiss real estate market in 2023: Interest rate hikes put the brakes on demand

Buying has become much more expensive than renting

The market for owner-occupied homes is currently undergoing a reversal of fortune, triggered by the spike in mortgage interest rates in 2022. Although owners delighted in unprecedented low mortgage rates for a decade, the rates have more than doubled over the past year. After 13 years, buying is more expensive than renting again. All told, the annual financial cost for residential property is now 47% higher than for comparable rental apartments. In other words, the ownership premium is back – in a very big way.

As a result, demand for residential property has taken a big fall, but by no means has it disappeared altogether. After a boom triggered by the COVID-19 pandemic, demand has returned to its long-term average. It has also been shown that skyrocketing prices are increasingly limiting households, both regionally and in terms of housing size.

Short supply boosts the market

While residential property has become significantly more expensive for new buyers, in many cases existing owners who have taken out long-term Fix mortgages can continue to benefit from persistently low ownership costs in many cases.

Even “buy-to-let” investments, where the purchased property is rented, do not pay off in most cases in terms of cost absorption. As interest rates rise, the owner is actually left with higher payments. So even as construction activity declines, more new construction properties are likely to be available for owner-occupied homes than in the previous year.

Due to record low construction activity, however, the dip in demand will only gradually be reflected by a higher supply of available properties and longer turnaround times.

Housing prices not likely to rise in 2023

Due to the shortage of supply, residential property had become much more expensive until recently. However, price growth passed its peak in the summer of 2022. With an increase of 5.2% for condominiums and 5.5% for single-family dwellings, price growth remained at a high level in Q4 2022. However, the ongoing drop in demand will significantly weaken price growth in the coming quarters. In 2023, price increases are expected to be lower, at 0.5% for condominiums and 1.5% for single-family dwellings.

Inflation expectations likely to drop in 2024

A comparison of the development of the prices of residential property and income shows that the price trend is no longer sustainable. The major market imbalance is due to the low interest rate environment that prevailed until recently. However, we are not yet seeing a speculative real estate price bubble, as the main characteristics are absent.

As the market outlook becomes gloomier, prices for condominiums and single-family dwellings can be expected to fall slightly in 2024. The combination of high real estate prices that are no longer sustainable and significantly higher mortgage interest rates simply adds up to an excessive cost burden.

Construction slump is driving up rental prices

Meanwhile, demand for rental housing has continued to grow in the past year. There are three reasons for this. The economy in Switzerland remains robust. Immigration from abroad has risen sharply as of late, with fewer foreign citizens moving away.

Combined with the construction slump in Switzerland, this means lower availability on the rental housing market. Metropolitan centers in particular recorded the biggest decline in rental apartments approved for construction in 2022, down 38% year on year. Relative to the absorption seen in recent years, rental housing production is likely to be too low in the majority (65 of 110) of regions in the coming one to two years.

As a result, vacancy rates in many places have fallen sharply and rents are becoming significantly more expensive. These trends will continue in 2023. Higher rents are likely to mitigate the risk of interest-related valuation adjustments for residential investment properties.

The Swiss real estate market remains robust overall

Generally speaking, the Swiss real estate market is relatively stable compared with those abroad and it is unlikely that there will be a sharp fall in prices. This is because domestic inflation is far lower than it is abroad. This, in turn, means interest rates will not skyrocket.

The strict financing rules for lending in Switzerland also keep the market from plummeting. However, the Swiss construction slump means a shortage of available housing on the market. We therefore expect that the real estate market will have a soft landing in Switzerland.