Where is the real estate journey heading? A classification by Claude Ginesta

Inflation is on its way

For a long time, there was talk of temporary inflation in the USA and the eurozone as a result of high fuel prices. But now it is here and is making enormous waves at 6 to 8 percent per year. The central banks, whose most important goal is price stability and thus combating inflation, have reacted accordingly: The biggest interest rate hike in 22 years has been decided and further rate hikes will follow.

In the US, where there are currently theoretically two vacancies for every unemployed person, wages will therefore rise sharply in combination with the interest rate hike. There is a lack of raw materials in this dried-up labor market and the high energy prices are not just temporary.

Overall, the global outlook is not rosy. But what does all this mean for Switzerland?

The increase in building material costs is estimated at 8 to 10 percent. Labor costs have not risen at the moment, although these types of work are all well utilized. The price of labor will therefore also increase in the foreseeable future and fuel prices remain high. Accordingly, SECO has now raised its inflation forecast for 2022 to 1.9%.

The Swiss National Bank is still taking a wait-and-see approach, as it is not yet following the significant rise in interest rates abroad, as this would lead to a weakening of the Swiss franc. However, it would be wrong to naively believe that this cannot change if inflation rises more significantly both here and abroad. The SNB will then do the same as the US Federal Reserve and pursue its main objective by subordinating everything else to price stability.

Interest rates will rise if there is inflation

The NZZ recently summarized the current developments excellently in a comprehensive article, which also contained a warning to investors: “Don’t fight the fed.”

The Swiss National Bank will also raise interest rates if inflation needs to be combated, even if we all cannot afford high interest rates. This is because the world and, above all, its economies are already heavily indebted. However, as these nominal amounts are not rising due to inflation, inflation naturally helps to repay the debt. So in this situation, an increase in interest rates or upstream inflation also has its good side.

Of course, this also applies to properties in Switzerland, 50 to 60 percent of which are mortgaged.

Rising interest rates will also increase the capitalization rates for investment properties , although commercial properties, which usually have fully inflation-linked rental agreements, are less affected than residential properties. This means that income from the latter will increase rapidly and, if there is no recession with less demand for rental space, these investments will remain attractive despite rising interest rates. The calculation for residential investment properties is somewhat different, as inflation can usually only be passed on at 40 percent and only with a delay of three to four years due to the reference interest rate lagging behind developments.

For many owners, there is one bright spot: 90% of property owners have fixed mortgages for five to ten years and none of them are directly affected by interest rate increases. However, the issue remains critical, as the cost of holding a property threatens to increase significantly in the long term.

Overall, however, it can be said that there is currently no need to worry too much on the interest rate front. Inflation seems to be under control and Switzerland would also benefit from a weakening of the Swiss franc. After all, this is a good opportunity to reduce our immensely high foreign currency reserves. Without a mandate, the SNB has effectively built up a “sovereign wealth fund” with CHF 1,100 billion in foreign currency – a mountain of foreign currency as high as the entire Swiss mortgage market.

As a result, the sharp rise of the last two months will not continue to the same extent. Especially as the key interest rates in Switzerland have not yet been adjusted.

In the long term, however, everyone will certainly have to pay more attention to their financing strategy than has been the case in the low interest rate environment of recent years.

The stock market has started to move

The stock market is currently turbulent and certain segments such as technology stocks in the US are showing strong downward trends. What is astonishing is how good their financial statements are and how much money they are still making. It is therefore not possible to speak of a fundamentally negative stock market sentiment.

What is clear, however, is that strong distortions on the stock market have a direct impact on the Real Estate market, as buyers of real estate often hold their equity directly or indirectly in shares, not least because of negative interest rates. If the value of money invested on the stock market falls, there is less money available to buy property.

The four most important factors for determining trends in the real estate market are inflation, interest rates, stock market activity and the supply and demand situation.

The supply and demand situation

Population growth in Switzerland and worldwide is continuing. It cannot be explained away as a constant with exponential development. We are currently experiencing an additional increase in demand for living space due to a sharp rise in refugees from Ukraine.

On the other hand, the construction of new living space is running far too slowly for many reasons. Construction costs will rise due to higher energy costs and soon also higher wages, and there is a lack of raw materials, semi-finished products and technical components. Or these will be significantly delayed – anyone ordering a heat pump today must expect delivery times of up to a year. Then, especially in urban areas, there are new obstacles for those wanting to build, as we have reported here. In the canton of Zurich in particular, the value-added compensation will not lead to increased construction activity either, as we have also reported on in a comprehensive article. As a result, densification is not progressing at the necessary gallop and a counter-trend can already be seen in rural regions: local initiatives for densification with lower utilization rates and greater distances will increase, as living has become even more important since corona. People want it to be spacious and at a good distance from their neighbors. Finally, foreign buyers are now effectively prevented from buying a property due to approval periods of often up to nine months for a Lex Koller certificate.

Renting is currently an attractive option, but here too there is a shortage of sought-after properties.

Accordingly, we anticipate a moderate flattening of demand in our regions due to the current situation with inflation picking up and interest rates rising. However, we consider this to be regulation and far from a collapse. After all, if we only have 300 instead of 500 dossier inquiries for a detached house in or around Zurich, it is clear that demand is still high. And as long as the creation of new living space lags behind population and income growth, we do not expect to see a total reversal of the trend. This also applies to price trends, as never before has there been so much inherited money or advance withdrawals to buy housing as there is today.

This means that the dream of home ownership will continue to exist and the number of people who can continue to afford it will not decrease significantly. However, we do not rule out the possibility of price adjustments in the long term. Nor do we rule out the possibility of a gap opening up that can only be resolved by making it easier to build attractive rental properties. This is an urgent social issue that requires politicians and each individual to use their influence.