Fulfill your dream of owning your own home. Despite high real estate prices.
People really want to own their own home. But high real estate prices often make this impossible. Why is residential property becoming more and more expensive? And how can you still fulfill the dream of owning your own home? Thomas Rieder, Real Estate Economist at Credit Suisse and an expert on the Swiss real estate market, explains.
Mr. Rieder, Switzerland is regarded as being a "country of renters." Has this changed since mortgage interest rates have been so low? Are there more homeowners today than 30 years ago?
Switzerland is traditionally a country with few residential property owners. But over the past three decades, homeownership has gradually become more popular. In 1990, 31% of people were homeowners, whereas today the figure is around 38%.
Why is that?
Particularly in the last ten years, low mortgage interest rates have been the main force driving demand for properties. This year, the annual costs for residential property will even reach a new low thanks to continuing record-low interest levels.
At the same time, the 2020 real estate study pointed to a renewed scarcity of supply, especially in central locations. Why is so little residential property being built?
The reason is the same – the negative interest rate environment. This makes investment properties with rental apartments very attractive for institutional investors such as pension funds. At the same time, it's easier for project developers to focus on rental properties, instead of developing residential property. Because otherwise they would have to sell the condominium units individually, thereby increasing their workload and costs.
What effect do the low levels of residential property construction have on price trends?
The combination of a low level of construction activity and low interest rates has led to a continuing rise in property prices. When residential property is scarce, there is a lot of interest in a limited number of properties. Residential property construction has been decreasing for several years now. And a look at current building permits shows that nothing will change in this regard in the short to medium term.
To formulate this somewhat provocatively: Does this mean that prices will keep rising forever?
No. Even if a lot of people want to own their own home, actual demand – and hence the upward trend in prices – is dampened. Because we have comparatively strict financing requirements in Switzerland. When assessing whether a future owner can afford a property, banks do not use today's very low interest rates in their calculations, but rather 5%. Owing to high real estate prices, this is a hurdle for many households that they cannot overcome.
When will the maximum price be reached?
It's impossible to make a precise forecast – but you can look out for triggers. For example, mortgage interest rates rising significantly and over a longer period would trigger a trend reversal. But there is no sign yet of interest rate increases of this nature. On the contrary, owing to the deep recession we are facing at the moment, it is likely that the era of negative interest rates will once again be extended for a significant period. We assume that the Swiss National Bank is likely to leave key interest rates at the current level until at least the end of 2021, which is why the low mortgage rates are unlikely to change anytime soon. As a result, the demand for residential property will remain high, and prices are likely to rise further.
Are there regional differences in terms of price growth?
We are currently seeing that price growth in the Zurich, Zug, and Geneva regions is relatively high compared to the rest of Switzerland. By contrast, we also have a few regions where prices are falling. That applies to Ticino in particular. The southern canton was undoubtedly hit hardest by the COVID-19 pandemic. But occasional price declines had already been seen there in previous years owing to the local market situation.
You mentioned the pandemic: The lockdown caused a lot of insecurity among potential buyers. Justifiably so?
Generally speaking, the security factor is hugely significant when making a major financial decision. And the lockdown, followed by a deep recession, stoked people's fears. Social distancing made house viewings a challenge, and the processes of banks and the various offices had to be digitalized at lightning speed. This took several weeks in many places. If we think back to March, it's completely understandable that the residential real estate market came to a standstill for a short time.
In contrast to commercial real estate, residential property was far less affected. Why is that?
On the one hand, the pandemic and lockdown made people realize how important it is to have your own place to live. You need a place where you feel at home. Some people may even have rethought their living situation and became more determined to own their own home. On the other hand, demand recovered rapidly because the financial uncertainty was quickly removed. The government's support measures, such as short-time compensation, were crucial for this, and many people's confidence returned.
So, people do want to own their own home, but the financial hurdles are significant. What strategies can buyers use to be able to afford residential property in spite of rising prices?
Making do with less space is one strategy. If we look at the size of apartments being built, owner-occupied properties these days are slightly smaller than 10 or 15 years ago. The second strategy is not to buy a property in the center where you work but outside in more affordable regions. A typical example is the Zurich metropolitan area: You can move to the cantons of Aargau, Thurgau or St. Gallen. In many places, there are good commuter connections to Zurich.
Doesn't a house on a greenfield site contradict the government's goal of stopping urban sprawl in Switzerland?
Yes, that's a dilemma (laughs). I think most people are opposed to urban sprawl. We don't want to cover Switzerland in concrete. But when it's a matter of your own housing situation, such ideals often take a back seat. It's all about realizing your own dreams, and, in central locations, it's often impossible to fulfill your dream of owning your own home. In that case, the decision to purchase a condominium in the suburbs or to build a house in the countryside is quickly taken. From an individual point of view, this is rational and completely understandable but contradicts the goals of wider society.
So, for many future homeowners, commuting will be part of their daily lives. What effect will the growing acceptance of working from home have on this?
It obviously makes a difference in terms of the time involved whether you have to commute to work three times a week or five times a week. People who only commute three times a week are probably more inclined to spend 20 minutes more on a train or in their car. This should lead to buyers widening the radius of their search for residential property. But people who have made a conscious decision to enjoy an urban life in the city or medium-sized center will probably have to keep looking – whether they're working from home or not. Personal preferences will not suddenly change because of the pandemic.
To conclude, what would you like residential property owners to take away from this?
Homeowners must be aware that mortgage interest rates will not always be so low. My tip is to consistently put aside some of the money that you are saving today thanks to low interest rates. With appropriate reserves you are well equipped for a higher interest rate environment. I would advise first-time buyers to take a close look at the possibilities of mortgage financing. But choosing the right strategy is a highly individual matter. Our regional financing experts can help you to find the ideal mortgage.