Real Estate Monitor Switzerland, Q4 2016
The Brexit vote last June and the recent upset in the US presidential election have showed once again that political events can shape not only exchange rates and interest-rate levels but also the Swiss real estate market. In contrast to the political arena, the real estate markets appear to have little potential to surprise next year. Rather, the current trends should stay on track. Respectable returns in the real estate market will continue to attract investors in 2017, encouraging ongoing output of floor space.
Interest rates remain low...
As the year draws to an end, it is time to review the last 12 months and consider the outlook for the coming year. There are increasing signs that we are approaching the end not only of the calendar, but also of certain trends that have been affecting the real estate market. First and most important is the multi-year period of falling interest rates, which is unlikely to be prolonged into the future. The US Federal Reserve Bank is in the process of winding down its accommodative monetary policy, albeit with less determination than originally announced. It is all but certain that our expectation of a second increase in US benchmark rates this month will be realized. The rise in long-term interest rates in recent weeks has already anticipated this development and, among other effects, has weighed on Swiss real estate funds. These have nonetheless reported an annual performance that outshines European real estate investments and Swiss stocks (page 14).
...and real estate remains attractive
Immigration too will provide less support for the Swiss real estate market in the future. For the first time ever, immigration from abroad declined by a double-digit rate this year, which has a direct effect on the absorption of rental apartments. Still, the year should end on a relatively conciliatory note for many property owners. The glass is still viewed as half full, and the challenges ahead can be faced with confidence. At any rate, as it stands, the interest rate level still has scope for another reduction in discount rates, which would give a renewed boost to valuations by year-end. Real estate yields are still attractive and should encourage further capital flows into the sector in the coming year, to the relief of the construction industry as well as other actors and service providers in the real estate market. You can read about the other effects we anticipate on pages 5 and 6.
For the first time ever, immigration from abroad declined by a double-digit rate this year, which has a direct effect on the absorption of rental apartments.
Owner-occupied housing: Spotlight on imputed interest rate
While tenants will probably be among the winners next year, potential homeowners face significant financing challenges that will be difficult to overcome, especially for young households. We see increasing evidence of collateral damage from the forced economic cooling on the owner-occupied housing market. In this environment, the topic of imputed interest rates is of vital interest. Ironically, long-term interest rates are making an unexpected leap at the very same time. Since our observations suggest that an easing of the affordability calculation would stimulate a renewed increase in prices, this issue comes down to a balancing act between real estate market stability and the promotion of homeownership (pages 7 and 8).
Prices lower due to second-home initiative
Furthermore, we have reviewed the effect of the second-home initiative on price growth for owner-occupied housing. Special statistical methods made it possible to quantify the causal effect of the second-home initiative on price developments. This isolated negative effect should be temporary, since its key drivers (increased supply, legal uncertainty) are weakening over time. Provided no other drivers suddenly spark negative effects, this would not be a bad time to purchase a holiday home (pages 10 and 11).