2022 real estate study: Too little construction activity is leading to higher residential property prices
The Swiss real estate market is characterized by sharply rising prices for residential property. That is making it more difficult for many to finance home ownership. Credit Suisse's 2022 real estate study reveals the causes: short supply, persistently high demand, and sales techniques such as the bidding process.
Financing home ownership is becoming a luxury
The 2022 real estate study by Credit Suisse makes one thing clear: Demand for residential property is still strong. It appears that demand is leveling off at a noticeably higher level than before the COVID-19 pandemic. Yet, buying residential property is moving further and further out of reach for many households with every year that passes due to the steep price increases.
Analysis of the automated search and notification settings on websites shows that interest in medium-sized and large condominiums has risen the most, while interest in small apartments is decreasing proportionately. In the area of single family dwellings, people are more often looking for large properties, as reflected in a 43% rise in the demand index since the end of 2019.
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Cost of a condominium in the major Swiss regions in 2021 (average advertised price for a medium-sized condominium with 110 m2 living space, 4.5 rooms). Click now, compare prices and check affordability.
1 Equity includes savings, securities, pension capital, and life insurance.
2 This calculation uses a long-term average interest rate of 5%.
Low mortgage interest driving demand for residential property
First of all, the effects of the COVID pandemic are a key driver behind the persistently high demand for residential property. The increasing significance of attractive and comfortable housing has fueled people's desire for home ownership. What's more, the greater proliferation of employees working from home is allowing them to widen their search radius to include less expensive regions, which are more likely to be affordable. Yet, the main driving force remains the extremely low mortgage interest rates. For instance, the actual annual cost of mortgage interest in 2021 fell 4.8%, making the average expenses a record-low CHF 4,452 per household.
Not enough apartments being built
The strong demand is coupled with a decreasing supply of newly built housing. In the past ten years, residential property construction has fallen by 40%. There are likely to be fewer new condominiums coming on the market this year as well. In contrast, there are signs of an upward shift in the trend for single family dwellings. In 2021, the number of building permits issued rose by 7.1%.
The constantly shrinking supply is reflected in falling vacancy rates. Within the span of a year, the number of vacant condominiums declined by 770 units, and there were 1,152 fewer vacant single family homes. That is the steepest drop in residential property vacancies since the beginning of this series of statistics in 2003. The vacancy rate is now only 0.48% for condominiums and 0.49% for single family dwellings. Vacancies could fall again this year.
Short supply is driving prices higher
The short supply is causing prices to go through the roof. For instance, the cost of a condominium in the mid-price range soared 6.7% over the course of 2021. Price increases on single family dwellings were even steeper, at 8.3%. The recent rise in both segments is significantly higher than the long-term average. Persistent excess demand will probably lift prices considerably higher in the coming year as well, though the boost will be slightly less than last year.
The sharp price increases have accentuated the imbalance between income and price growth. This trend is expected to continue. That could lead to louder calls for additional regulatory measures.
As a result of the sharp price increases in recent years, financing residential property has become increasingly difficult. If affordability is calculated using an imputed interest rate of 5%, the cost of a newly built condominium now corresponds to 33.4% of an average household income. For a single family dwelling, that burden even amounts to 48% (calculation based on 80% debt financing).
Bidding processes also drive prices higher
The growth in prices is also being caused by the increasing number of bidding processes. The bidding process involves advertising a property for a minimum bid, and interested parties can bid on the property in one or two rounds. This has advantages for the seller. In a market with excess demand, they can take advantage of those who are willing to pay the highest price. Until a few years ago, the bidding process in Switzerland was used only in isolated cases. As a result of the rising demand for residential property since the COVID-19 pandemic broke out, the process has become widespread.
Demand for residential property remaining strong in 2022
It is safe to assume that the trend in demand for residential property will change very little in 2022. Despite somewhat higher inflation, we expect the Swiss National Bank to leave key interest rates unchanged until at least the end of 2022. That ought to keep mortgage interest rates extremely low, allowing the financial conditions for purchasing residential property to remain attractive.