Real estate market: Quo Vadis?

The real estate market has really galloped in the last two years and in some market regions price increases of 10 to 15% have been recorded – per year. There was no region or product that did not rise. This raises the question of what factors are responsible for these enormous price excesses and whether this trend will continue.

Covid and negative interest rates as the biggest fire accelerators

Covid and home office have dramatically increased the demand for Real Estate. Changing living requirements and the new flexibility to move the place of work to the home have also boosted peripheral markets. The negative interest rates have helped to ensure that people would rather invest their money in useful tangible assets than see it melt away in their bank accounts.

The second-home initiative and Covid as a toxic mix

The markets with the greatest price distortions are the tourism regions. Here, the second-home initiative ensured that the last residential properties were completed under the old law between 2014 and 2019 and that the original oversupply was absorbed in practically all regions by 2020. Ticino and Valais still have the most liquid markets. In Graubünden and the Bernese Alps, however, the markets have dried up. Here, the enormous increase in demand was met by a supply that did not expand any further. An increase in demand which, incidentally, was mainly focused on domestic customers due to travel restrictions and the possibility of working from home. Vacations in their own country are popular with the Swiss, and having their own vacation home is much sought after.

The loser is the first-home market in tourist regions

Nevertheless, the tourist regions are not growing in terms of primary residences. There is a noticeable migration to the Central Plateau. The federal government has also instructed cantons with negative population growth to zone out building land reserves that cannot be built on within 10 years. In the next few years, building land reserves will be withdrawn from the primary housing market. However, this first-home market is definitely dependent on affordable housing. It should also be noted that home office and tax optimization opportunities – pension fund payments in the canton of GR are up to 50% cheaper than in the midland cantons – are encouraging more and more Unterlanders to move to the mountains. You can benefit from lower prices compared to a second home and usually also compared to an expensive apartment in the urban midlands. The local population is suffering from this development. Should it be established in a few years’ time that the second-home initiative has prevented affordable housing for all in the Alpine region, it could be reversed with a new initiative. But even if a new initiative were to be adopted, it would no longer be possible to create living space for first or second homes, as the building land reserves have been neatly eliminated by the canton. After all, the canton can refer to the fact that we once adopted the initiatives and laws on spatial planning. However, it is doubtful whether the electorate really knew how toxic these various laws and initiatives would work together.

Housing shortage in cities due to new interpretation of old laws

The latest development concerns judges who suddenly reinterpret old laws and ordinances and thus in effect create new laws and starting points. For example, new federal court rulings on noise protection play a very questionable role, which are then interpreted quite differently by the courts in cities such as Lausanne or Zurich. Apartments cannot be built in Limmatstadt because the street is suddenly too noisy. In the city of Zurich alone, over 200 new apartments were prevented by two questionable rulings. It would be welcome if these questionable federal judges were unmasked and their rulings had to be discussed publicly and controversially so that these issues enter the public discourse and an awareness is created on a broad front that affordable housing is being prevented with such rulings. That is why politics is now called upon, because everyone from the left to the right has the same interest: The city belongs to everyone and this requires new living space. New noise protection regulations must therefore be introduced to enable investors to construct urgently needed new buildings.

Misunderstood protection goals prevent new buildings

Furthermore, the Federal Inventory of Sites worthy of Protection (ISOS), which was originally only intended for federal buildings, is now declared binding for entire cities for new buildings. Sites and thus old buildings are simply protected and no one ever had or has the opportunity to take a stand on these protection goals. There was also never a vote on ISOS. Here, the federal government has created a building contract without the people. Nevertheless, the courts have taken up the idea of ISOS and prevented many new buildings with questionable decisions. Because every objector today tries to justify objections with ISOS and unfortunately these are all too often granted.

The desired densification in the cities can therefore not take place as planned. If demand remains very strong, this will have a significant impact on the supply side. The result is very significant price increases, which will be further fueled by the new value-added tax on upzonings. Behind this are civil servants and politicians who are avoidably filling the coffers of the canton and communes at the expense of the middle classes, who will soon no longer be able to afford home ownership. A grievance that has hardly been discussed in public to date and the implications of which few people are aware of and which should also be addressed by all political parties: if we penalize urgently needed upzonings with excessive value-added taxes, this is another factor why there will be a lack of affordable living space in urban areas in the future.

Outlook for the future

The real estate market itself is expected to continue to perform well. The above-mentioned government measures and restrictions to tighten supply, the continued very low interest rates and the huge increase in money on stock exchanges and in real estate markets are giving the market the necessary boost. According to a survey by a major bank, only 7% of buyers can currently afford to buy a property in the Zurich area on their salary. In order to raise the necessary equity for private real estate, up to 80% of advance withdrawals and inheritances are apparently used. Accordingly, a large transfer of wealth will take place over the next few years to a younger generation that has the necessary purchasing power for real estate even at a high price level. This is also at the expense of SMEs, which are increasingly being excluded from this market. In the long term, this development will lead to a change in the structure of society, a healthy population mix and the labor market in Switzerland’s sought-after urban regions.

Source: Wüest Partner

From an international perspective, the trend in Switzerland is in the middle of the pack. The price increase between the 2nd and 3rd quarter amounted to Around 7.5% for private property in the first quarter of 2020 and 2021. In the USA, Sweden and Australia, prices have risen by almost 20% in this period. These markets therefore have the greatest risk of decline. Moreover, there is no speculation in Switzerland, because the available land reserves and the long approval procedures do not allow “production on stockpiles”, as can be observed in markets with infinite land reserves, especially in boom times.

So despite the rapid pace of development, it is taking place at a somewhat more moderate pace than elsewhere in Switzerland. This will benefit us if one or other price-determining factor changes. And dark clouds have long been visible on the horizon.

Here are the most important events that could slow down the market and perhaps even push it into a downward trend:

• Geopolitical events such as (trade) wars or a break-up of the EU.
• New financial crisis due to global debt crisis.
• Interest rates in Switzerland are rising very rapidly by at least 1.5%. But you wouldn’t even feel the first 0.75%. In addition, 90% of mortgages are secured with long-term interest rates, which would simply lead to a postponement and staggering of the resulting problems.
• Government regulations, as in 2013, when the National Bank tightened the credit guidelines.

According to the cycle theory, the market should also experience a downturn after an uninterrupted upswing since 1995. In addition, real estate inflation has no correlation with actual inflation, which was -0.1% from 2011 to 2021.

Source: Wüest Partner

For the time being, however, negative interest rates are continuing to drive investors to invest their money in tangible assets, cryptocurrencies or shares. These markets are “state-sponsored” as a result of the expansive monetary policy of the national banks. Even the SNB has today created a kind of “sovereign wealth fund”, the size of which amounts to around Swiss franc with the mortgage market in 2020 at CHF 1,138 billion. is to be compared. One reason why the SNB is probably not intervening more actively in the real estate market is that it has made itself a systemic risk with its expansionary monetary policy.

Source: Wüest Partner

Source: Wüest Partner

Finally, a look into the crystal ball

Sellers will also be happy about the achievable prices in 2022. Anyone who can afford to buy a home or a vacation home is still well advised to invest their money in a tangible asset in the current low interest rate environment. And if you are wondering whether and how you will be able to afford home ownership or renting in one of the metropolitan areas in the future, I recommend that you keep your eyes and ears open for the state, cantonal and local decisions, new laws and votes that will result in more or less living space. The topic is important, affects us all and the time is ripe to start a broad public debate and get involved. Above all, I recommend that all Zurich residents also read my article on the means by which the middle classes are being driven out of the city. is recommended.