Raiffeisen Market Report 2017*

Rise in interest rates stops skyrocketing The momentum in residential real estate prices clearly calmed down in the second half of 2016. For the final quarter, our hedonic (quality-adjusted) transaction price index for single-family homes even shows a slight decline of 0.4% compared to the previous quarter. In contrast, condominium prices rose again by 0.6% following a decline in the previous quarter. Previously, new record lows in mortgage interest rates had boosted demand for residential real estate and given prices another temporary boost. However, this tailwind has recently faded. Rather, the fall in interest rates from record lows has led to an increase in financing costs for buying a house or apartment. The affordability of real estate financing has not improved any further. This means that the high price level for real estate demand is once again gaining in importance. Demand and supply with spatial divergences This applies in particular to expensive single-family homes.

In order to be able to continue purchasing residential property, more and more households are either accepting compromises in terms of location or are switching to less expensive STWE. Based on our data pool, the average price for single-family homes at the end of 2016 was CHF 976,000. The maximum willingness to pay of many prospective buyers has therefore been exhausted. However, this has not recently led to an increase in oversupply. The reason for this is the prompt adjustment of the offer. Fewer and fewer new single-family homes are being built. Meanwhile, demand for condominiums continues to benefit from diversion effects from the single-family home segment and the rental market. The rise in interest rates has recently reduced the difference in housing costs between comparable purchase and rental properties. However, buying is usually still much cheaper than renting. Accordingly, there has so far been no significant increase in vacancy rates for owner-occupied apartments throughout Switzerland. However, there is an increasing spatial decoupling of supply.

New STW construction is shifting more towards peripheral and less expensive regions. Although property is more affordable there, demand is still concentrated in central locations. All in all, following the temporary spike in the first half of 2016, we continue to expect a soft landing for residential real estate prices with interest rates continuing to rise moderately – albeit with increasing spatial divergences. More regional details on the development of the residential real estate market can be found in Raiffeisen’s community information (https://www.raiffeisen.ch/gemeinde-info). However, due to the tentative normalization of interest rates, it is by no means appropriate to speak of similar dangers for the real estate market as during the crash a quarter of a century ago (more on this in the Focus section). Further correction in rents ahead In the rental apartment segment, we expect the downward trend to continue despite the slight increase in rents in the fourth quarter. The lower level of immigration and the declining willingness to pay on the part of those seeking rental accommodation, combined with an unchanged high expansion in supply, are reflected in a significant rise in vacancy rates. In addition, a further reduction in the reference interest rate later in the year should have a dampening effect on existing rents. 

* Published by:
Raiffeisen Investment Office & Chief Economist
Raiffeisenplatz
9000 St. Gallen

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