A substantial number of people buy homes with the aim of “flipping” them. These are speculators, so defined because, first, they do not intend to live in the properties and, second, they do not intend to hold them for more than a few months or, at most, a year.
Some level of speculation is helpful to the real estate market because it provides liquidity. However, above a certain level, it adds to transaction costs and can create a bubble. That level can be determined by measuring the price-rent or price-earnings ratios. These widely used affordability indicators compare average house prices to, respectively, average annual rents and individual incomes. An elevated ratio and, more importantly, one which deviates widely from its historic average, can indicate speculative excess.
Switzerland price-to-rent ratio
Source: Trading Economics
In Switzerland, the ratio was 126.7% at the end of 2022, as shown in the chart above. That’s 71% above its 2002 low, but still 11.4% below its all-time peak in 1989, decades ago. This suggests that the Swiss real estate market may not be in a bubble.
In terms of defining a bubble, the ratios have not deviated greatly from their long-term averages. The price-rent chart confirms this, while the next chart of the price-earnings metric ranks Swiss as just the OECD’s tenth highest.
House price to income ratios for OECD countries (2015=100) as of Q1 2023 or the latest available
Finally, a bubble requires a catalyst, a spark that will ignite the combustible confluence of easy money, abundant market liquidity, and rampant speculation. The writers of Boom and Bust state that, historically, the spark has been either a new technology, such as the internet during the “dot-com” bubble (1995-2000) or a new government policy – or both. This differs from Hyman Minsky’s theory of market instability in which even just a small price reversal can spook speculators and cause a crisis.
The technology sector, exemplified in the chart below by the tech-dominated NASDAQ market, has been a stock market leader for more than a decade on the back of growth in online sales, social media, blockchain, artificial intelligence, and many other factors. However, none of these represent new technology.
Performance of NASDAQ, S&P 500, and Russell 2000 since the 1980s
Source: Yahoo Finance