Residential Property: The End of an Era
The almost 15-year era of rising prices for residential properties appears to be at an end. In the coming quarters, an overall sideways trend can be expected. Single-family dwellings ought to outpace condominiums in terms of price growth.
For nearly one and a half decades, condominium prices have moved in just one direction: north. The high price level and stricter regulations have cooled price growth for several years and, most recently, even brought it to a halt. Prices of residential properties are currently edging down in most regions of Switzerland, and should be more or less flat for the foreseeable future. Very low interest rates and a reduction in construction output argue against a sharper price correction. However, since ever fewer households meet the stricter regulatory requirements for financing, a surge in prices in the coming quarters is equally unlikely. In recent quarters, prices have risen most appreciably in regions where prices were still manageable. As a result, households with less than above-average income are increasingly unable to fulfill the affordability criteria for homeownership in these regions too.
Price Trend: Single-Family Dwellings Have the Advantage
Prices have moved in divergent trends lately depending on the residential format. While prices for condominiums have fallen 4.1 percentage over the last four quarters, prices for single-family homes were just inside positive territory with growth of 0.4 percentage. Single-family dwellings reported stronger price growth in nearly all regions.
The picture was different in only two regions: prices for condominiums rose more than prices for single-family homes in Zug, and fell less sharply in Geneva. This was the norm for many years, since demand was narrowly focused on homes in urban settings, which typically boosts demand for condominiums. Since the second half of 2014, however, single-family dwellings have reported stronger price growth. In the next section, we discuss several different reasons behind this.
Demand concentrates on inexpensive houses in peripheral regions
Homeownership is still more affordable in peripheral regions. Consequently, there is more demand from households in these regions for residential property. Besides this local interest, there is additional demand from households in more expensive regions who are seeking homes at lower prices. Since single-family homes tend to dominate the market in peripheral regions, where condominiums are underrepresented, the aggregate demand tends to lift prices for single-family homes. In contrast, demand for homeownership has eased in urban areas, especially among borderline households. This hits condominiums hardest, since they are more numerous in cities.
Single-family dwellings now extremely rare in urban areas
It is increasingly rare to find single-family homes in urban markets. The high price of land means that few single-family dwellings are built in cities. At the same time, existing homes are disappearing, most often in order to make room for new multi-family buildings comprising numerous condominiums. The scarcity of single-family homes in cities specifically supports their prices.
Under the new Spatial Planning Act, the requirements for designating zones as development land have become significantly stricter. This makes existing development land comparatively scarcer, both in and outside urban centers. In future, the pressure to develop land will have a more concentrated effect on existing building zones. The increasing scarcity, combined with expectations of greater exploitation due to a push to densify, inflate land prices. And since prices for single-family dwellings typically include a greater share of land value, their rise is currently steeper than prices for condominiums.
Falling interest rates boost value of single-family homes
Last year, the markets were surprised by a further drop in interest rates. Lower interest rates give a disproportionate boost to the value of single-family dwellings, since these homes retain their value longer. Here the value of the land accounts for a greater proportion of the property value, since unlike buildings, land is not subject to the same depreciation over time. So the value of single-family homes depends to a greater extent on events in the future: the further a certain value is projected into the future, the greater its exposure to interest rates. This is illustrated by simple present value calculations. Lower interest rates thus lift the value of single-family homes to a greater extent than the value of condominiums.
It is difficult to judge which of the factors mentioned above carries most weight. The fact that interest rates have been declining for some time suggests that the trend is more likely to be driven by the shift in demand to areas where single-family homes predominate, or by the increasing scarcity of building land.