Is There Anything More Personal than One's Own Home?
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Is There Anything More Personal than One's Own Home?

Credit Suisse expert Fredy Hasenmaile talks about the "pipe dream" of owning property, falling rents, self-driving cars, couples who live in separate apartments, digitalization in the construction industry and his children's inheritance.

The desire to own one' own home is profoundly human. Why is that, Mr. Hasenmaile?

Our homes are very important because they are a place where we can retreat from the world. We want to be in charge of the place we call home. In particular, we want to be able to decide when to leave that refuge. Being evicted is just about as traumatic as losing a job.

From an economic perspective, is it rational to want to own a home?

Yes, if you have sufficient income and assets. That allows you to wait out the cyclical fluctuations of the real estate market, and you're able to benefit from increases in the value of your land over time. For most households, home ownership is a concentrated risk that is increased still further by a mortgage. So you need to have reserves.

Singapore provides subsidies for residential property in the belief that homeowners are better citizens, as the country's minister of finance pointed out in Bulletin (1/2014). Do you agree that there are sociopolitical benefits to a high level of home ownership?

Homeowners are happier, at any rate; surveys have shown that to be the case. They also save more and invest their savings in maintaining their property or paying off the mortgage. Both of these things are prudent and ensure that most homeowners have a comfortable financial cushion in their old age.

Switzerland's approach is the opposite of Singapore's. Homeowners are treated less favorably, as the tax burden on their property's imputed rental value is higher than the mortgage tax deduction. Should the state do more to promote home ownership?

No tax system is universally popular; that would be impossible. But property owners have benefited greatly in recent years from falling interest rates. The unpopular imputed-rental-value provision balances things out somewhat in favor of tenants.

I find it worrisome that people today want to live alone even when they're in a relationship.

In San Francisco, some apartments are rented through an auction process, while in Stockholm, the real estate market is regulated nearly to death. What approach should Switzerland take?

Regulations and subsidies have serious consequences over both the medium and the long term. The most recent financial crisis began with the real estate crisis in the United States, where property ownership was encouraged so much that people were able to buy a house with practically no equity capital. At the same time, it is acknowledged that legal protection for tenants is very limited. The Swiss system is well balanced, in my view. It has led to a functioning market for both owner-occupied housing and rental properties. Internationally, this is very rare.

But here, too, the market is changing; there are more owners and fewer tenants.

Conditions for home ownership have been very favorable for the past 25 years. In the 1990s, it once again became affordable to own a home, and the use of pension funds for a home purchase has been permitted since 1995. At the same time, interest rates have declined dramatically.

Unaffordable homes

Unaffordable homes

Calculated percentage of gross income of an average household, given the following parameters: 5% interest, 1% maintenance, 80% loan-to-value ratio, amortization to 2/3 within 15 years.

Source: Credit Suisse Swiss Real Estate Market 2017

Despite historically low interest rates, you say that the purchase of a home today is a "pipe dream." Why?

Apartments and houses have become incredibly expensive. For most people, low interest rates are irrelevant because financial institutions have to look at whether you're capable of paying an interest rate of 4.5 or 5 percent – only then will you be granted a loan. Today the idea of purchasing residential property is an illusion even for much of the middle class.

Is it a problem for society if the average citizen cannot afford to own a home?

From an economic standpoint, it's important to prevent the market from overheating. Real estate crises do a great deal of damage, as Switzerland has learned from its own experience. We're not currently experiencing a real estate bubble, but it's not a good thing that the middle class and mortgage lenders are the ones suffering the disadvantages of regulatory measures. The middle class is unable to buy, while mortgage lenders are providing fewer loans.

Can you answer the perennial question of when interest rates are going to go up again?

For that to happen, there needs to be inflation. Only then will the central banks raise interest rates. Yet digitalization, globalization and the aging of the population are keeping inflation in check, which is why interest rates will remain low for a long time to come. Ultralow interest rates will become less available, but for the foreseeable future I see no prospect of a return to the high interest rates of the past. A side effect of extremely low interest rates is excessive construction.

If people are interested in long-term investments, should they still consider real estate, or is it better to invest in equities or bonds?

Real estate has outperformed other asset classes for the past 20 years – and with lower levels of risk. But it would be irresponsible to assume that this will continue to be the case in the coming decades. The incredible drop in interest rates fueled real-estate yields, and that's not going to happen again – interest rates can't drop much further into negative territory. There are limits. The picture will very likely be different in 20 years; I can imagine that equities will again rank at the top.

If you still want to purchase real estate, they say you should focus on three things: location, location, location. Is that still true?

In a declining market, that rule of thumb is more relevant than ever. But a more interesting question is this: What constitutes a good location? The answer changes all the time. Proximity to public transportation has become more important in recent years, while online shopping has made it less crucial to be near retail businesses.

Will self-driving cars change how we view a location's quality?

Absolutely. Today, in many places, accessibility is a limiting factor. That will change dramatically. The locations that will benefit are up to 30 minutes from the city center by car and have no or only suboptimal public transportation.

You predict that over the long term, demand for residential property in Switzerland will collapse. Why?

Demographic factors are enormously important. The effect of the decline in births in the second half of the 1960s, after the introduction of the contraceptive pill, has been largely mitigated by immigration. But while the market is adding 20,000 housing units per year today, that number will drop to below 9,000 between 2030 and 2040, according to our calculations.

The role of home ownership is declining, large amounts of office space are unoccupied, and online businesses are replacing brick-and-mortar stores. Are any real estate segments booming?

The action is in niche segments: logistics, housing for the elderly, care homes, student dormitories and housing for single people.

And vacation homes? When people were able to build, they did so before the second-home initiative went into effect. There is now a high level of availability, and prices are low.

That's true. In addition, the Swiss franc is currently strong, and there is some legal uncertainty because of the new regulations. The importance of all of these negative factors will decline over time. So it is, indeed, a good time to buy a vacation home.

How have residential models in Switzerland changed over the years?

Today one-person households are most common, making up 35 percent of all households. In 1960 they were the smallest group with only 14 percent.

Unabated boom in construction: rental apartments

Unabated boom in construction: rental apartments

Source: Credit Suisse Swiss Real Estate Market 2017

What happened?

It's quite simple: We became wealthier – so there was less need to compromise. This is reflected in an increasing emphasis on individual fulfillment.

Today many people want to live alone, even when they're in a relationship. Is that a positive trend?

This phenomenon can be observed among both men and women, and I, personally, find it worrisome. I'm speaking here not as a real estate specialist, but simply as a member of society. Living with someone else promotes tolerance and an ability to compromise. In my experience, these social values decline when people have lived alone for a long time. It's really too bad; isn't it precisely through living with someone else that we gain unforgettable experiences? [See Fig. 3.]

What effects does the aging of society have on the real estate market?

In the future, we will need fewer single family dwellings and more homes that accommodate the needs of older people. New residential models are emerging in which older people have only one small private room, while they share some spaces and services with others.

As a tenant, how can I benefit from the highest vacancy rate in years?

There are more and more options to choose from. And tenants now have more bargaining power when dealing with landlords. Rents are no longer continuing to rise; indeed, they may soon go down in some cases.

Should I ask my landlord to lower my rent?

Yes, but only if the reference interest rate drops again. If you have a long-standing rental agreement, then you're probably paying less than market price. In that case there's not much room for negotiation.

Vacancy rates for rental properties in large cities have remained low so far. Will this change?

Even in the city centers, the availability of rental apartments will increase. In a recent survey by the city of Zurich, only a minority of respondents reported having difficulty finding an apartment.

You often talk about a "digital revolution" in construction. What benefits will that bring?

Digital construction allows for incredible increases in efficiency. Over the past few decades, productivity in the construction sector has hardly grown at all, as the heads of major construction companies will tell you. They predict that the cost of construction will drop by 30 percent over the coming decade. Construction is a complex topic that involves numerous parties. Thanks to networking, digitalization is the ideal solution.

Living alone despite being in a relationship: Relationship status man/woman by age, in %, 2013.

Living alone despite being in a relationship: Relationship status man/woman by age, in %, 2013.

Source: Credit Suisse Swiss Real Estate Market 2017

What about you? Where do you live?

I attach great importance to a short commute, so I live in the heart of Zurich, an expensive city. I also have children I want to see every day, despite working long hours. We live in a neighborhood where everyone knows everyone else and we all help each other – it's almost like a village. That's worth a lot to me, and it's some compensation for not yet being able to fulfill my desire for a home of our own.

Would you rather leave a house or a large amount of money to your children?

If my children have the necessary financial expertise and a great deal of discipline, then money, because it offers a lot of flexibility. If not, a house is ten times better.