The past 18 months (since the start of 2022) have not been happy ones for the real estate sector. In fact, this sentiment is true for nearly all forms of assets across the globe. Triggered by the war in Ukraine, inflation and interest rates have reawakened from a multi-decade slumber; homebuyers were faced with banks being less willing to offer mortgages, while sellers grappled with crumbling market activity.


Real estate capital value indices (in local currencies, Q4 2021=100)
Source: UBS

The UK, known for its tendency to be more volatile than most other markets, took a leading role and led the decline, while the Asia-Pacific region was barely affected. Regardless, nearly every corner of the globe felt the repercussions to some extent.

Simultaneously, many commentators began to forecast a gloomy outlook for house prices worldwide. Even the Swiss residential market, which is typically less susceptible to such concerns, managed to attract a negative analysis.

In light of all this, one might be inclined to postpone any plans of investing in Swiss real estate, opting instead to observe the market from the sidelines until the dust has settled. A closer look, however, is necessary to see if this prudence holds merit or not.

Swiss residential real estate: Where are we now?

In 2022, following a swift rebound from the initial shock of the pandemic, demand for owner-occupied housing in Switzerland regrettably relapsed to subdued levels, as witnessed in 2020. This retreat can be attributed to the aftermath of Russia’s invasion of Ukraine, coupled with the notable upsurge in interest rates and inflation.


Swiss housing demand indices (last data point: December 2022)
Source: Credit Suisse

The annual interest on a five-year fixed-rate mortgage has risen from about 1% to 2.7% in just one year. While this adjustment may seem modest when juxtaposed against the historical average interest rate of 4% for similar loans over the long term, the practical impact was substantial. Essentially, it meant that in cash terms, the annual loan servicing cost for an average condominium (4.5 rooms) rocketed from CHF 8’250 to CHF 21’380.

For young adults, this was an extremely heavy additional burden, especially when almost all other costs, like fuel, food, travel, entertainment, etc. – had also surged considerably.


Food, energy, and overall prices in Switzerland (2015=100, January 2003 – July 2023)
Source: OECD

The actual values of homes, however, did not experience a sustained decline; instead, it was the rate of growth in prices that fell. Over the second quarter of 2023, for instance, average home prices increased by 1.2% but remained 2.4% higher than the year before, and an impressive 15.9% above what they were by the end of 2019.

In this context, it was affordability, rather than valuation, that was the deciding input for potential buyers in the Swiss residential real estate market, throughout 2022. This continues to be true for 2023, with Switzerland having the 9th highest house-price-to-income ratio worldwide.


The house-price-to-income ratio in selected countries worldwide (2015=100, Q2 2023 or latest available)
Source: OECD

For investors, these costs signify that the buy-to-let market is no longer attractive despite the ongoing expansion in demand. Even though, the upward movement of rental rates for homes, which can partly be attributed to the persistent growth of net immigration, could paint a different picture.

As a consequence, the yield from real estate investments now lags at less than 1.5 percentage points behind that of 10-year Swiss government bonds. This disparity is surely not enough to make high-maintenance rental properties a more appealing investment than "buy-and-forget" bonds – whether government-issued or corporate.

Given these considerations, one might expect prices to undergo a gradual and prolonged decline. The reason this has not yet come to pass, however, is predominantly due to an acute issue of scarcity in supply.

Much more building is required – urgently

In 2022, there was a continued decline in construction for both houses and apartments, leading to a 3% reduction compared to the preceding year, as well as a 41% drop from the 2011 peak. In its real estate report from March 2023, Credit Suisse characterized this shortage as “dire” and “likely to become dramatically more acute”.

The bank attributes the supply issue to Switzerland’s spatial planning policies, which have always been restrictive but became especially so with the passing of the Spatial Planning Act coming into force in 2014. This legislation limits the expansion of permitted building zones, forcing developers to operate only within existing limits.

The implementation of this law was a lengthy process as its approval across the 26 cantons was only finalized in October 2022. Even then, the full effect of this legislation will only become noticeable once all cantons have adapted their regulations to comply with the new federal requirements.

The chart below illustrates to what extent the new restrictions have exerted a chilling effect on the issuance of new building permits for the past several years (‘SFH’ refers to single-family homes; ‘CDM’ refers to condominiums).


Planning applications and building permits in a number of residential units (moving 12-month average)
Source: Credit Suisse

As of March 2023, renting one’s Swiss home has definitely become more attractive than buying, in financial terms. Valuations, on the other hand, remain firmly subdued due to the structural shortage of new buildings Even if the rise in prices, therefore, continues to slow, which seems to be likely for this year, the decrease is likely to be small and gradual.

The outlook on commercial properties

The status quo for office spaces looks pretty similar. Planning applications and permit allocations continue to lag behind their historical long-term trends, while hybrid working habits, developed during the pandemic, are apparently becoming a permanent feature in working life, with employees dividing their working week between their homes and the office.

Most of the current market activity revolves around refurbishing existing properties to meet higher energy efficiency standards, as well as tailoring office buildings to fit the “new normal” of hybrid work models.


Planning applications and building permits for office spaces, moving 12-month totals (in CHF million)
Source: Credit Suisse

That being the case, a significant price decline is unlikely to happen. Valuations are well-supported by the structural shortage, even allowing for the probability that the current economic doldrums will persist. According to the OECD, the Swiss economy is projected to attain a mere 0.6% growth rate for this year, with a modest upswing of an anticipated 1.6% in 2024.

The outlook for Swiss residential real estate in 2024

While the economic forecast does not exactly paint an optimistic picture for home valuations, it is neither entirely discouraging. Indeed, the expectation of slightly better growth next year should be supportive.

The future course of inflation and interest rates is, however, more significant, as the recent trajectory has been promising. After hitting a post-pandemic peak of 2.4% in February 2022, the core rate of price increases fell to just 1.6% in July 2023.

Karsten Junius, an economist at J. Safra Sarasin, a Swiss private bank, noted that Switzerland was the first currency area where both headline and core inflation had fallen below their target range. The Swiss National Bank (SNB) has been using a notional range of 0-2% since the start of the millennium.

Despite this favorable performance, Mr. Junius cautioned that certain components of the price statistics — most notably rents and energy costs — were likely to rise in the short term, adding 25 basis points to inflation. He expects the SNB to increase its policy rate by September 2023, which will likely be the final move in this tightening cycle.

At Le Bijou, we are inclined to agree that when prices are rising at a rate that is already below the SNB’s target, arguments about whether there will or will not be a minor short-term upward trend seem inconsequential. Even if the rate were to rise to 2%, it would still be within the target and Switzerland would still have the second-lowest rate of inflation in the world.


Inflation rates by country (in %)
Source: Trading Economics

In any case, these circumstances have been widely analyzed and discussed in both financial and mainstream media, making it highly probable that they have already been factored into real estate valuations. Consequently, the prospects for these valuations are considerably more dependent on actual demand and supply.

Final thoughts

As previously mentioned, the growth in demand has fallen but has not plummeted below its long-term average. Nonetheless, as stated by Credit Suisse, “the extraordinary boom witnessed during 2020 and 2021 has come to an end”. Meanwhile, factors such as affordability* and rising costs seem likely to keep demand in check during 2024.

* Credit Suisse stated that a household with a Swiss national gross average income of CHF 119’000 would have to spend 40% of that figure to service an 80% loan on a medium-sized new-build condominium. If the intended purchase was a single-family house of average size, the proportion of household income required to cover the interest would rise to 59%.

Still, the lack of new construction effectively places a systemic floor under Swiss real estate valuations. This floor is embedded in federal and cantonal regulations as well as administrative processes, which are unlikely to undergo significant changes.

That being said, it appears that valuations will continue to decline in 2024 for both residential and commercial properties. This decline will stem from a confluence of heightened costs, reduced affordability, and a lethargic economy. The slope, however, is unlikely to be substantial, seeing as both inflation and interest rates are already nearing their peak levels in this cycle.

For prospective investors who have not yet entered the real estate market, or who seek to add to an existing portfolio, this is good news. With the long-term unchallenged upward trend in prices remaining in place, the current setback provides an investment opportunity that, just 18 months ago, seemed unlikely to occur.

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