Swiss housing market slowing sharply
Last Updated: January 31, 2015
- Owner-occupied apartment prices were up by 2.15% (2.09% inflation-adjusted) in 2014 from a year earlier, the lowest annual increase since 2006, according to the Swiss National Bank (SNB).
- Single-family home prices increased slightly by 1.08% (1.02% inflation-adjusted) in 2014 from the previous year, down from annual rises of 4.65% in 2013, 3.74% in 2012, 4.10% in 2011, 4.66% in 2010 and 5.04% in 2009.
Rental apartments showed the same trend. The average price of rental apartments rose by 1.93% (1.87% inflation-adjusted) y-o-y in 2014, according to the SNB. Old rental apartments gained 1.83% (1.77% inflation-adjusted) y-o-y in 2014, while new rental apartment prices rose by 5.22% (5.16% inflation-adjusted).
The property market's slowdown can be attributed to efforts by the federal government and the Swiss National Bank to cool the market by stricter lending criteria and lowering housing debt (which currently makes up about 90% of all household debt).
“This development is long overdue,” said Dominik Matter of Fahrländer Partner. “Prices have reached such high levels in certain geographic areas and market segments that households simply could no longer afford them.”
- Northwestern Switzerland recorded the biggest price gain in owner-occupied apartments, at 4.12% (4.06% inflation-adjusted) y-o-y in 2014.
- Southern Switzerland had an annual house price increase of 3.52% (3.46% inflation-adjusted).;
- Central Switzerland had a house price increase of 3.01% (2.95% inflation-adjusted).
- Eastern Switzerland had a house price increase of 2.33% (2.27% inflation-adjusted)
- Western Switzerland had a house price increase of a meagre 0.15% (o.09% inflation-adjusted).
Some regions are now experiencing falling house prices. In 2014, the Berne area saw an annual house price drop of 2.21% (-2.27% inflation-adjusted); Lake Geneva area prices fell 0.89%, and Zurich area prices fell 0.84%.
The Swiss property market is expected to continue slowing this year, according local property experts. That's because Switzerland’s economy is expected to contract by about 0.5% this year, mainly due to falling oil prices and declining exports caused by the strengthening of the Swiss franc against major currencies. It expanded by just 1.25% in 2014, after growing by 1.9% in 2013, 1% in 2012, 1.8% in 2011 and 3% in 2010, according to the International Monetary Fund (IMF).
Despite the recent slowdown, the property market's "bubble risk" intensified in Q3 2014, rising by 4% from the previous quarter, to reach 1.29— considered in the ‘risk zone’ by UBS, who publish the bubble index.
Poor rental yields in Geneva and Zurich
If you are buying in Switzerland it is usually not the rental yield that interests you, because in the past Swiss rental returns been comparatively poor. But as the global house price boom has gathered steam over the past 15 years, Swiss rental returns have stayed steady, no doubt due to the fact that foreigners are discouraged from buying in Switzerland. Swiss rental returns are still classified by us as "poor". But rental returns in much of the world are now worse than they used to be, and Swiss returns are no longer particularly low.
Luxury apartments in Geneva command average square metre (sq. m.) prices between EUR 10,000 to EUR 11,000.
In our sample, a 120 sq. m. apartment in Geneva costs on average EUR 10,600 per sq. m.. A 120 sq. m. apartment can be rented for around EUR 3,300 per month. That means a yield of around 3.81%
In Zurich, the average price per sq. m. for a 120 sq. m. apartment is around EUR 10,600. A 120 sq. m. apartment can be rented for around EUR 3,400 per month. That means a rental yield of around 3.22%.
Swiss rental income tax is very high
Rental Income: Income is taxed at the federal, cantonal and municipal levels. The total tax liability could easily exceed 50%. Federal tax rates range from 0% to 11.5%.
Capital Gains: Capital gains are tax-free at the federal level (unless the gains are from the sale of business property). All cantons, however, levy their own taxes on gains from the disposal of immovable property located in the canton.
Inheritance: Inheritance tax is levied at the cantonal level, on the net assets transferred to the beneficiaries.
Residents: Residents are liable to pay federal, cantonal and municipal income taxes on their worldwide income.
Total transaction costs are low in Switzerland
Closing costs are relatively low in Switzerland. Roundtrip transaction costs, i.e., the total cost of buying and selling a property, range from 3.5% to 9%. The estate agent’s fee comprises a large chunk of the cost at roughly 3% to 5% (plus 7.6% VAT), usually paid by the seller.
The buyer pays the Real Estate Transfer Tax which ranges from 0.0% to 3.3%, depending upon the canton. Since January 2005, Transfer Tax has been abolished in Zurich.
Swiss law is pro-tenant
Around 61% of all households are renters; so it is not surprising that the law in Switzerland is pro-tenant.
Rents: he initial rent can be freely agreed between the landlord and tenant. However, within 30 days the tenant can appeal against the rent as abusive.
Tenant Security: Tenancies tend to revert to indefinite duration tenancies. This is not necessarily a disaster for the landlord, because three months termination notice can be given by either side.
But the court may give the tenant an extension of up to four years, in cases where and eviction would cause hardship.
Swiss economy will slip into recession in 2015Switzerland’s economy expanded by just 1.25% in 2014, after growing by 1.9% in 2013, 1% in 2012, 1.8% in 2011 and 3% in 2010, according to the International Monetary Fund (IMF). The economic growth forecast for 2015 was cut from the initial 1.9% to -0.5%, mainly due to the 'franc-shock' and falling oil prices, according to the KOF Swiss Economic Institute.
"The direct effect on the Swiss business cycle of the increase in the value of the franc will be felt on the export market," KOF said. "The Swiss economy is expected to experience a short recession in the summer semester of 2015.”
Economic growth was relatively strong from 2004 to 2007, with average annual GDP growth of 3.2%. However with the global financial crisis, economic growth slowed to 2.2% in 2008. By the 4th quarter of 2008 Switzerland was in recession. GDP contracted by as much as 1.9% in 2009, before returning to positive growth in 2010.
In 2014, the overall unemployment rate stood at about 3.4%, up from 3.2% in 2013, 2.9% in 2012 and 2.8% in 2011, according to the IMF. The country’s jobless rate is expected to remain 3.4% this year and to increase to 4.1% in 2016, according to KOF.
In December 2014, consumer prices dropped by 0.3% from the same period last year, after an annual deflation of 0.1% in the previous month, according to the Swiss Federal Statistical Office. From 2000 to 2013, Switzerland has an average inflation rate of just 0.7%, according to the IMF.
Swiss Franc's stunning rise
On January 15, 2015 the Swiss franc soared against major currencies when the SNB removed its CHF1.20 = EUR 1 exchange rate cap. Immediately the Swiss franc gained 39% against the euro and almost 30% against the US dollar.
The cap was introduced in 2011, when investors fled the crisis-torn Euro for Swiss assets. Switzerland's exporters cried foul when the Swiss franc rose past the US$1.10 mark in March 2011. It went to US$1.20 in June 2011 during the Greek sovereign-debt crisis. It surged to US$1.30 in August 2011.
The exchange rate cap stopped the appreciation of the domestic currency against major currencies.
However recently the SNB decided to abandon the cap in face of monetary easing by the European Central Bank (ECB), believing that increased demand for safe haven currencies such as the Swiss franc would make it impossible to defend the cap.