Rental apartment construction continues to boom. Even in the wake of COVID-19.
Rental apartment construction continues to boom despite the COVID-19 crisis. However, the situation is different for owner-occupied housing, where the number of building permits has dropped to a record low. Because demand remains high, prices are back on the rise.
Building permit volume for rental apartments is recovering quickly
The national housing market did not escape the COVID-19 crisis and the related lockdowns in Switzerland unscathed. The number of planning applications submitted and new building permits issued plummeted in March and April. In the meantime, it has become apparent that the slump was only temporary in nature for the rental segment.
While the number of building permits for the rental segment dropped in the first quarter by 21% versus the previous quarter, most of this decline was already made good by a 15% increase in the second quarter. If we compare the number of permits from the second quarter of 2019, the figure is even 12% higher. One primary reason for this increase is that planning applications for major projects submitted at the end of 2018 and in the course of 2019 have just recently been approved.
Negative interest rates boost construction activity in the rental segment
Planning applications in the rental apartment segment have also seen an increase. However, the downturn lasted somewhat longer in this area and growth remained negative in the second quarter as well. Since May, Switzerland has seen an above-average number of planning applications submitted, in part because negative interest rates are likely to continue for some time. This is helping to maintain the appeal of investments in rental apartments despite higher vacancy rates.
Rental apartment construction continues to boom, especially around Zurich and in the Zug and Lucerne regions. What's more, in many places the anticipated expansion in supply is higher than in the previous year. In western Switzerland and especially Ticino, however, only a few regions will have a large number of new rental apartments.
Number of building permits for residential property is on the decline
The situation is completely different for owner-occupied properties. Thus, while the rental housing stock is likely to expand by 1.1% in the next six to 18 months, the expected increase in the supply of owner-occupied property will be just 0.8% of the housing stock. In the last 12 months, only about 11,800 condominiums and 5,750 single family dwellings were approved – a record low.
Therefore, the number of owner-occupied homes being built is insufficient, because the general conditions for residential property remain good thanks to a continuation of low mortgage interest rates. This, in turn, means higher demand. The result? Higher prices for owner-occupied properties that have thus far remained unaffected even by the repercussions of the COVID-19 pandemic. As the economy continues to struggle, the increase in the price of owner-occupied properties may slow somewhat, but will remain positive overall for 2020. The only factor that continues to limit demand and price growth is the strict financing requirement (based on imputed values) for potential home buyers in Switzerland.
Construction activity likely to remain low in the owner-occupied segment
A turnaround is not on the horizon: The number of planning applications for single-family dwellings and condominiums is still below its long-term average. Availability is scarce as a result. And as long as negative interest rates continue, demand for multi-family dwellings is likely to remain robust. The focus of construction activity is therefore likely to remain on rental apartments instead of owner-occupied property.