PRICE EXPLOSION / INFLATION: CAN WE STAND IT?

PRICE EXPLOSION / INFLATION: CAN WE STAND IT?

IMMOBILIENPREISE

PROPERTY PRICES: A ROCK IN THE SURF

Nevertheless, it would be a mistake to believe that the significant rise in mortgage interest rates has no influence on the demand for residential property. After all, mortgage interest costs for new mortgages have more than doubled since the beginning of the year. The interest rate on 5-year fixed-rate mortgages rose from 1.23 per cent to 2.69 per cent between the beginning of the year and the end of August. The higher interest rates have consequences: The number of search subscriptions has fallen by 10 per cent since the end of 2021, while the number of transactions in the first half of 2022 was 8 per cent lower than in the previous year. However, as new construction activity continues to decline, there is still a certain excess demand. Due to the shortage of building land and the preference for building rental flats, the number of new builds of owner-occupied homes in recent years has only been a shadow of earlier times. This has led to a shortage of supply and driven prices to new highs. However, the tense situation on the residential property market is likely to ease slightly in the longer term.

This is because demographic ageing means that more and more houses and condominiums will come onto the market in future or be passed on to the younger generation. The baby boomer generation (i.e. those born between 1946 and 1964) owned more than 40 per cent of Swiss owner-occupied homes in 2019. If the even older generation is also taken into account, the over-55s held a total of 57 per cent of Swiss residential property. Based on these figures, it is estimated that around 690,000 owner-occupied homes will come onto the market by 2045.

It is not only in the residential property sector that new construction activity remains too low. The same applies to rental flats. In the past two years, a total of 4,800 fewer flats were approved for construction than between 2017 and 2019. Meanwhile, demand for housing has increased. This is due to several factors: the strong economic recovery, combined with the ongoing pandemic response, is leading to additional new households. In addition, increased immigration is leading to higher demand for rental flats. In the first seven months of the current year alone, 13,600 more people moved to Switzerland than in the previous year. The number of people leaving the country actually fell slightly in the same period. Last but not least, the high net number of 55,000 people in need of protection from Ukraine, who could play a greater role in the housing market in future as their length of stay increases, also contributed to this.

As a result of the decline in construction activity and rising demand, there has been an accelerated decline in empty flats. Overall, the vacancy rate fell from 1.54 per cent to 1.31 per cent in 2022. With a decrease of 9869 empty flats, the sharpest decline since 1978 was recorded. The decline is broad-based and affects all segments, all flat sizes and a majority of regions. As a result of the sharp fall in vacancies, the oversupply on the rental flat market that has been much discussed in recent years is now only an issue in individual regions. And the shortage of owner-occupied flats and single-family homes has become even more acute.

NO TREND REVERSAL IN PROPERTY PRICES IN SIGHT

The persistently high property prices come as a surprise to many. This is because there is normally a strong correlation between rising interest rates and falling prices: When the cost of home ownership rises, renting becomes more attractive; this reduces demand and prices fall. That is logical. Yet since the beginning of the year, interbank interest rates have risen by 2%, tripling interest rates on 10-year fixed-rate mortgages from 1% to 3%, but property prices have not fallen. How can this unexpected development be explained? 

Firstly, we need to understand what the situation was like before the rise in interest rates. Let's start with the supply side: In December 2021, analysts said that the proportion of properties advertised for sale was the lowest it had been in 13 years. But why were there so few properties available? On the one hand, there is the RPG (Spatial Planning Act) that came into force in 2014, which restricts the possibilities for building new flats and whose effects are slowly being felt; on the other hand, there is the COVID pandemic, because when you are faced with uncertainty, you tend to take fewer risks. 

RECORD HIGH IN DEMAND FOR PROPERTY

 IMMOBILIEN NACHFRAGE

On the demand side, the explosive mix of historically low interest rates for several years, population growth through immigration and the desire to counter instability through property investment has led to a record high in demand. The consequences of this: a price increase of almost 8% for residential property by 2021. With this in mind, we now look back at the events of 2022. After the COVID pandemic was brought under control, there was a strong recovery in the economy and, despite a record influx of people due to the Ukraine crisis, an extremely low unemployment rate. As a result, there were fewer empty flats, which meant that the rental housing market was tighter and rents rose. This has never happened before in the last five years. Renting has therefore become less attractive for those who are undecided. Let's now return to the Ukraine crisis, which is at the centre of many current challenges. In addition to demographic change, it has of course led to additional instability. But it is also partly responsible for the rise in the cost of raw materials, which is an additional risk factor for developers who are thinking twice about embarking on a new project as they cannot be sure whether they will be able to pass on the higher construction costs to their already very high sales prices. 

To summarise, on the one hand mortgage interest rates are rising, but on the other hand there are still very few offers - both for resale and new builds - and the attractiveness of rental flats is declining. However, the effect of interest rates outweighs this, and since May the number of people looking for a property has fallen by almost 35%. But that still leaves 65% of a historically high base! 

UNLIKELY TO SEE LOWER PRICES IN THE NEAR FUTURE

And that is currently enough to prevent a downward trend in prices. However, one question remains: how long will this last? No improvements in supply are in sight in the short term. The answer must therefore be sought on the demand side. And if interest rates remain relatively stable over the next 12 months - which is the view of most banks - prices are unlikely to fall any time soon. 

HERE YOU CAN RELY ON THE EXPERTS AT WENET AG, WHO ARE ALWAYS HAPPY TO PROVIDE YOU WITH THE RIGHT OFFERS IN THE OFF-MARKET AREA FOR A SEARCH ASSIGNMENT. CONTACT US AND WE WILL BE HAPPY TO ADVISE YOU.

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