Interest rates have reversed their course. What lies ahead for the real estate market?
After a period of many years in which negative interest rates were the norm, rising rates have marked a trend reversal and are sowing uncertainty in the real estate market. In this interview, Thomas Rieder, a real estate economist and expert on the Swiss real estate market, explains what mortgage holders should keep in mind.
Mr. Rieder, interest rates have risen dramatically since the beginning of 2022. What are the causes of this development?
The primary cause is steep inflation. We are now seeing inflation rates of more than 8 percent, particularly in the euro zone and the US. At a level of 3.4 percent, however, Switzerland too finds itself above the upper target of 2 percent set by the Swiss National Bank (SNB). This is why the SNB raised the key interest rate from -0.75 percent to -0.25 percent in June.
How do you expect interest rates to develop in the future? How long do you think this phase of rising interest rates might last?
Inflation is still too high, which is why we expect the SNB to carry out two more rate hikes by +0.5% and +0.25% in September and December, respectively. We will most likely be at 0.5 percent by the end of the year. This would put key interest rates back in positive territory and make Switzerland's negative interest rates a thing of the past. Future interest-rate development will depend heavily on how quickly inflation comes back down again in Switzerland. We currently expect Switzerland's key interest rates to remain below 1%.
How much more expensive do you think mortgages could get?
The next 12 months are unlikely to see interest rates for SARON mortgages rise much higher than 2 percent. Fix mortgages have already risen dramatically. The high degree of uncertainty has recently caused overshooting in this context. This means that the sharp rise in inflation has already been priced in for Fix mortgages, and their interest rates are unlikely to rise much further over the next 12 months.
From a long-term perspective, however, current mortgage rates are still at a comparatively modest level. Mortgage interest rates of 4 to 5 percent were not unusual in the period just before 2008, and even reached as high as 8 to 10 percent between 1989 and 1992. As such, it must always be kept in mind that while interest rates are no longer as low as we have become used to in recent years, it would still be an exaggeration to call the current level of mortgage interest rates high.
Under these circumstances, do you expect demand for ownership to decrease?
The dramatic rise in mortgage interest rates will probably have a noticeable dampening effect on demand for home ownership. The demand for residential property is still greater than the supply, however, which is why we do not expect prices to decrease. That said, we do expect the very steep price growth seen recently to weaken considerably.
What are the advantages and disadvantages of the different mortgage models in an environment with interest rates that are fluctuating and trending upward?
The past has shown that money market mortgages, which is to say SARON mortgages, are generally cheaper than Fix mortgages over their term as a whole.
However, households should always be aware that in an unfavorable scenario, interest rates for money market mortgages could rise rapidly and dramatically. If buyers are unwilling or unable to take on this risk, Fix mortgages are often the better choice. The additional cost of a Fix mortgage can be seen as a form of insurance premium. Buyers pay for the security of a constant interest rate over the term of the mortgage.
What should clients with existing mortgages pay attention to now? Do they need to adjust their mortgages?
Existing mortgage holders are in a good position in principle, since they can afford an interest rate of 5 percent according to the banks' affordability calculation.
For many owners with Fix mortgages – who account for 80 percent of Swiss households – nothing will change anytime soon, since they took out their mortgages while interest rates were still low and are still benefiting from low interest rates. Nonetheless, they too can expect higher mortgage interest costs once their Fix mortgage expires, which is why they should start setting corresponding funds aside now.
In cases of money market mortgages, the question is whether switching to a Fix mortgage now would still be worthwhile or if the interest rates for Fix mortgages have already climbed too high. However, households with SARON mortgages should also calculate how much financial flexibility they have for further interest rate increases and how important planning security is for them in regard to mortgage interest costs. From an individual perspective, this could mean that changing from a SARON mortgage to a Fix mortgage is the right decision even if the Fix mortgage ultimately costs more over the term as a whole.
Existing mortgage holders are in a good position in principle.
Thomas Rieder, a real estate economist and real estate expert at Credit Suisse
Should potential buyers take out a mortgage at all right now, or is waiting a better strategy?
If you have found your dream property and can also afford it, then there is no reason at all not to buy it, even in the current interest rate environment. Yes, the interest rate level is higher now than it has been over the last few years – but you should keep in mind that rates have been extraordinarily low until recently. It is entirely possible that we will never see the interest rate level drop so low again in the years to come.
That said, buyers need to be aware that the price level of residential property in Switzerland is currently very high. As I mentioned, we still expect prices for residential property to continue growing in Switzerland. If interest rates continue to climb significantly and demand decreases more dramatically, however, prices will probably decline in the medium term. The same would apply if Switzerland slid into a prolonged recession.
What advice would you give clients on taking out a new mortgage?
It is very important that they take a detailed look at their individual situation together with a financial specialist. This will enable buyers to select a strategy that is specifically tailored to their individual needs when choosing a mortgage.