Real estate prices in most parts of Switzerland have risen over the past ten years, and so there is continued concern about the spectre of a «real estate bubble». Seen in a sober light, however, a dangerous plunge in prices is quite unlikely.
There is hardly any other term than «real estate bubble» which has been cited so often in the last few years and been the subject of controversial debate. What does this term actually mean? History teaches us that phases with favourable interest rates and economic growth can significantly drive up the value of assets. Because the central banks of the western countries have pumped unimaginable amounts of cheap money into the market, there is the threat of price bubbles: if money cannot be sensibly invested in other areas and because low interest rates make it easier to get financing, the demand for real estate grows. Property in Switzerland has never had a higher value than today. The fact that you can get banks to loan you money for almost nothing results in great incentive to purchase real estate or start construction projects.
What is a real estate bubble anyway?
The spectre of a real estate bubble is so threatening because a «real estate crash» could seriously endanger the banking system and possibly even the entire domestic economy. In the real estate crisis of the 1990s, Swiss banks lost approximately 60 to 70 billion francs due to bad mortgage loans, starting with commercial properties. Under circumstances, private individuals can also experience a nasty surprise with their own homes: in the worst case scenario, market values for single-family homes and condominiums lose 30 to 40 per cent of their value. When a real estate bubble bursts, property values fall lower than the bank mortgages supporting them, and homeowners must furnish additional funds. In the worst case, then, private individuals would lose the savings they have invested in their own properties.
In its assessment of the financial situation last spring, the Swiss National Bank (SNB) repeated its warning of «imbalances» on the real estate marketplace. More recently, there has been a focus on properties purchased by individuals for investment purposes. Because of low interest rates, it cannot be excluded that a price bubble could develop on this investment market.
A changing market
The latest figures, however, lead to the conclusion that the overall situation has not become even worse but rather has relaxed a bit. «We expect that the market is starting to change», summarises Matthias Holzhey, a real estate analyst at UBS. For the reason, he points out troubles in selling new construction in regions from Zurich’s Gold Coast, through Lucerne’s less populated regions all the way to Aarau. In addition there is negative news concerning the economic environment. Most economists expect weak growth with difficulties arising first of all in the tourist and export industries and with increasing unemployment. In fact, it’s already possible to see some traces of this slowdown in the real estate marketplace, even if nobody is expecting a significant collapse. «There is increasing room to negotiate prices, especially for high-end properties in the greater Zurich metropolitan area, on Lake Geneva and in tourist locations as well as in Upper Engadin and in Valais», says Holzhey. In other words, the listing prices for properties for sale and even for apartments to rent are, as before, relatively high. However, real estate transactions done privately are at clearly lower prices than the current listing prices for these properties.
While real estate prices in virtually every region of Switzerland rose in the period between 2008 and 2013, the situation has meanwhile changed to some extent. Prices are stagnant in Zurich as well as in other parts of eastern Switzerland and the middle of the country (see the price map at the very bottom). On Zurich’s «Gold Coast», in the Geneva metro area and in the Upper Engadin region, prices for high-end real estate are trending downwards. In contrast, in some places there is a race to catch up, such as in the Canton of Uri and other parts of the Lucerne metropolitan area, but also in the Glarus region, the River Linth region and the Canton of Fribourg. Here there seems to be a crowding-out effect. In those places where, for example, single-family homes are still relatively inexpensive there is now growing demand and prices are rising disproportionately.
Hot spots: Geneva and Zurich
Holzhey, however, does not expect to see the real estate bubble burst. As before, people continue to talk about a few hot spots, regions with very high prices. This is the case particularly for the regions near Zurich and Geneva. Experts emphasise, though, that not all properties or apartments in these geographical regions are collectively threatened by price drops. «Average properties», according to real estate expert Holzhey, «which are affordable for most potential buyers still continue to enjoy high demand.» After all, favourable interest rates and a lack of other opportunities to invest money safely with a reasonable return are without a doubt supporting the real estate marketplace.
Banks are hitting the brakes
Alfred Meili, Chairman of the Board of Meili Unternehmungen AG, refers to significantly lower demand. «Even when it comes to well-furnished new construction in top locations, demand today is weaker than it was just one or two years ago.» The cause, however, lies less in the behaviour of those seeking a place to live but rather quite simply the restrictive policies banks have put in place. If the SNB continually issues warnings about dangers in the real-estate marketplace, this will eventually have consequences. «Today every loan application must be thoroughly reviewed, and for every loan a detailed report must be prepared and then examined», according to Meili. In particular, a person’s financial ability to carry a loan for newly constructed owner-occupied homes is being strictly assessed by banks. Measured by the costs of land and construction, though, he believes the prices of new construction projects today are thoroughly realistic.
In contrast, he feels that generally older buildings intended as investment properties are too expensive. «Today’s purchase price of such real estate investments, for example in the Zurich metro area, correspond to a net return of only from three to four per cent», remarks Meili. In the eyes of many experts, such high prices are not sustainable with the associated low expectations on returns. According to Meili, older condominiums coming on the market are often overpriced. «From my viewpoint, prices of 10,000 francs per square metre for condominiums from the 1960s with modest living areas and construction quality are totally exaggerated.»
Nothing is safer than…
Depending on the property and the location, it is still wise to be cautious. A recommendation for people who are thinking about purchasing an older property: anyone who thinks they can afford a Ferrari must also make sure they also have the necessary funds for service and repairs. And a tip for those who tend to have little leeway in their finances: «Nihil solidum, nisi solum». This saying, which comes down to us from the ancient Romans, in English translates to: Nothing is more secure than land. This familiar saying, though, applies only over the long term. Or should we say, historically. After all, property values fluctuate over the short and mid-term. Thus make sure you are well hedged against such fluctuations but also against possibly higher mortgage rates.