The past three years have brought forth a remarkable confluence of, potentially, three epochal events. From the Russian invasion of Ukraine to the escalating political polarization in the US and Europe, and the global coronavirus pandemic, uncertainty has rippled among investors in general, not just in real estate.
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The foregoing being said, trusting sentiment is never the way to go; it is transient and ever-changing. The question that needs to be asked is: What are the concrete facts when it comes to investing in Swiss real estate?
Swiss real estate price indices (Q1 2000 = 100)
Source: Global Property Guide
When the lockdown started in early 2020, there was a slight initial hesitation in the market, barely noticeable on the chart. However, this quickly faded as prices resumed and even accelerated their pre-COVID uptrend. Partly, this reflected the hiatus in construction activity that the lockdown caused, exacerbating an already chronic housing shortage.
More importantly, the monetary policy of the Swiss National Bank (SNB) also played its role. Fearful of the economic slump that the pandemic threatened, the central bank reduced its policy rate to a negative 0.75%, the world’s lowest.
A borrower’s market
House buyers responded enthusiastically, perhaps motivated to some degree by the prolonged periods spent indoors during the lockdown, which revealed shortcomings in their current living spaces, including a lack of space. Yet, exceptionally low borrowing costs were not the only factor driving this demand. Indeed, Switzerland has witnessed a steady population increase since the late 20th century, with rising immigration, particularly from the EU, being a significant element in this trend.
Swiss yearly net immigration and population growth
Source: Bloomberg
On the supply side, circumstances also favored strong house valuation trends. Hampered by restrictive planning laws (e.g., the Swiss Planning Act from 2014) designed to limit urban sprawl, the supply of new homes had been falling even before COVID-19 – with numerous industry experts expecting the trend to persist.
Building permits and planning applications in the number of residential units
Source: Credit Suisse
A legal mandate for scarcity
According to the bank, the main legal culprit has been the Spatial Planning Act of 2014, which limits the extension of allowable building zones, forcing developers to work within currently permitted areas only. Moreover, although the act was officially approved by all 26 cantons in October 2022, its full impact will only be observed once each canton updates local regulations to include the new provisions – proving things are bound to continue following the trend.
What’s more, monetary policy during the pandemic lockdown was also a significant boost for home prices. Some CHF 35 billion was pumped into the national economy in order to support shuttered businesses and their furloughed workers. An unknown but, likely, significant proportion of that would have been spent on deposits and other costs associated with buying a house or apartment.
The Kraken wakes
While the coronavirus pandemic certainly had a significant positive impact on Swiss real estate values, this phenomenon was only temporary. Far more significant was the Russian invasion of Ukraine in February 2022. Russian energy supplies to Europe were cut, waking up both inflation and interest rates that had been sleeping in a downtrend for decades.
Switzerland interest and inflation rates from 2004 to 2024
Source: Trading Economics
The annual interest on a five-year fixed mortgage rose from about 1% to 2.7% during the aftermath of the invasion. Although modest compared with the long-term average rate of 4%, the upturn pushed the yearly cost of a loan to buy an average condominium from CHF 8’250 to CHF 21’380.
Following the invasion, there was some initial hesitation in real estate valuations, but the uptrend resumed quickly, albeit at a slower rate. Even so, demand was crushed, not because of higher prices, but as total housing costs rose sharply and the affordability ratio worsened.
A comparison of the financial outlay for owner-occupied and rental housing (last data point: Q4, 2022)
Source: Credit Suisse
In its 2023 real estate study, Credit Suisse estimated the average annual service cost for a mortgage rose to between 40% and almost 60% of the average national income, depending on whether the home being purchased was, respectively, a condominium or a house. When considering the impact of this, it's crucial to note the broader context, which was that food, fuel, clothing, and so forth had also risen substantially.
Thwarted predictions
With buyers facing such constraints, one might expect significant downward pressure on real estate prices in Switzerland. That they are doing little worse than stagnating is, probably, due to the fact that our economy is also defying the bearish forecasts made by most analysts during 2022.
During that period, it was almost universally expected that the sharp upsurge in prices and interest rates would lead to a US recession in 2023. While Switzerland wasn't predicted to experience the same fate, prominent analysts like Pictet foresaw a drop in GDP growth from 2% in 2022 to just 0.5% in 2023. This prediction dates from December 2022, but, by September 2023, the persistence of satisfactory levels of consumption prompted the government to revise its projections, now foreseeing a 1.3% increase for 2023 and a further 1.2% for 2024.
Nevertheless, the factors that have undermined the housing supply for decades remain in place. In particular, new houses remain in short supply as the construction industry remains hampered by planning restrictions and labor shortages (carpenters and electricians, in particular).
Swiss residential construction activity forecast
Source: Wüest Partner
The chart above paints a highly bullish picture of the supply outlook in real estate. Even after the post-COVID recovery, residential construction activity was stagnant throughout 2023, declining notably towards the year-end and into this year. Meanwhile, the number of building applications remains subdued, suggesting any house-building recovery in 2024 will be modest.
Simultaneously, borrowing costs are expected to drop significantly as the central bank starts cutting its policy rate from the peak of 1.75% in June 2023. UBS is predicting three reductions, with the first expected this June. Along with falling inflation, this is likely to enhance affordability, thereby encouraging new demand – further fueled by increased immigration.
All of which is, surely, an impressive testament to the stability and resilience of Swiss real estate. So much so that Le Bijou’s previous assumptions of a setback in valuations are looking too pessimistic now that inflation, interest rates, and the national economy have not followed their ‘predicted’ paths.
