"Without Imputed Rental Value, Home Ownership Would Suddenly Become More Attractive"
Fredy Hasenmaile, Head of Real Estate Analysis at Credit Suisse, believes that the abolition of the imputed rental value is more likely than it has been for a long time. He tells us what this means and what else property owners need to watch out for in the future.
Does owing their own home make people happy?
Fredy Hasenmaile: Well, happiness is a fleeting emotion. I would rather talk about feelings of great satisfaction. Studies show clearly that homeowners feel more secure and more independent and find it easier to realize their own potential. These empirical results are very robust and do not just apply to Switzerland.
So, would it actually be desirable to have more homeowners?
Switzerland is one of the few countries to have a rental housing market and residential property market that operate alongside each other. Households can, in principle, choose between these two segments, which each have their own advantages and disadvantages. As a result, people have a high level of satisfaction in Switzerland when it comes to their living situation. This balance is an accomplishment that should be handled carefully. So I can very much understand the current criticism that young households in particular are struggling to enter the residential property market.
Demands have been made to abolish imputed rental value. What would that mean for this system?
Particularly with the low interest rates we are currently seeing, homeowners would benefit. The imputed rental value is not as negative as homeowners perceive it to be – as something virtual that should be abolished. It claims to strike a balance between tenants and homeowners, and these two functioning markets benefit the national economy. This is why it is important to maintain a sense of proportion when it comes to changes to the system.
What are the chances of imputed rental value being abolished?
The chances are 60:40 in favor of abolition – the highest they have been for the last ten years. The topic has only gained momentum since the Swiss Property Owners Association has no longer wanted to have its cake and eat it too by insisting on the continued deduction of mortgage interest. However, the matter is not over yet. For the cantons, tax on imputed rent is currently a source of income, and it is unclear how the resulting tax losses could be compensated. Therefore, resistance to the plan is also to be expected.
What could cause the plan to fail?
What will be decisive is whether the Federal Assembly will still leave the door open for deductions to be maintained. The industry will certainly campaign for further maintenance deductions, meaning that there is a danger that in the end too much will be demanded again. It is very likely that the electorate will have the final say.
The chances are 60:40 in favor of imputed rental value being abolished.
Fredy Hasenmaile, Head of Real Estate Analysis at Credit Suisse
Who would benefit if imputed rental value were to be abolished, and who would not?
Young first-time buyers who need high policy loans, and who will no longer be able to deduct these from taxes, will be impacted. Frugal households that could reduce their mortgage will primarily benefit, as will older homeowners. Their policy loans are generally much lower and this means that, in the current system, they can make fewer deductions. However, they have to pay tax on notional income, and their pension is sometimes not enough to cover this.
What would the consequences of this be for the market?
Residential property would suddenly become more attractive, which should stimulate demand and raise prices – provided that interest rates were to remain relatively low. Furthermore, if this abolition were only to apply to the main residence, as planned, then there would be an incentive to move policy loans to other properties so that deductions could still be enjoyed. Perhaps this restriction should be thought through again in detail.
Will paying off a mortgage suddenly become attractive without imputed rental value?
In any case, it will be more attractive than it currently is. We would also then expect the mortgage market to shrink, while, at the same time, risks for lenders would increase. This is also why banks would not be happy about such a development – competition on the mortgage market is already very intense.
At the end of 2016, prices for residential properties were below the previous year's levels for the first time in 14 years. Is residential property becoming more affordable again?
The situation on the residential property market is currently very stable. Prices have survived the short correction and started to rise again. I am only concerned about the fact that prices are so dependent on the interest rate. However, we do not expect there to be a significant rise in interest rates in the near future.
As a result of the low interest rates, those who buy today seem to be better off – at first glance – than if they were to rent the same property. Could that change soon?
In the future, the benefit of owning residential property due to low interest rates will decrease. However, this is a very slow process and parity with rental accommodation is still a long way off.
Could this also lead to a crash?
For this to happen, interest rates would have to rise significantly, which we are not expecting. If this were to happen, then the first step would be a fall in demand for residential property. The property market would freeze, so to speak. The developers of owner-occupied apartments would then have trouble selling their apartments and homeowners wishing to sell would have to make price concessions.
Perhaps, from the outset, buyers should opt for a property that is 20 square meters smaller so that, whatever happens, they can still keep up their mortgage payments.
Fredy Hasenmaile, Head of Real Estate Analysis at Credit Suisse
What is the best way to protect against this eventuality?
Anyone who buys today has to assume that prices might take a hit. Homeowners simply have to ride out these phases. In the long term, a time will come again when it will be possible to sell at the purchase price. It is just important that homeowners protect themselves to make sure that they don't have to sell at the low point of a house price bear market.
What does that mean, in concrete terms?
For example, we see divorce cases that lead to someone having to sell. You can protect yourself against losing your job. Fortunately, here in Switzerland, we are relatively well insured against illness and accidents. However, you should never put all your eggs in one basket. Perhaps, from the outset, buyers should opt for a property that is 20 square meters smaller so that they can still keep up their mortgage payments if the worst comes to the worst.
If you were buying your own home, what would you look out for?
If someone wants to buy at this moment in time, perhaps because they have a family and want to own property, I would give them this piece of advice: You are taking a big step, so protect yourself. My second tip would be: Make sure that it really is suitable – both in terms of quality and in terms of what you are looking for. It is important that, even after two years in a property, you are still convinced that making the purchase was the right choice. Then, even if prices do fall temporarily, this won't be a problem for you.