The real estate market in Zurich is overheated. This news made the rounds in the media at the end of September 2020. What does this mean for the Swiss real estate market in general and for you as an owner or buyer in particular?
Once a year, UBS publishes the UBS Global Real Estate Bubble Index 2020, most recently on 30 September 2020. This study examines how residential property prices have developed in 25 major cities worldwide, including Geneva and Zurich. The higher the index value, the greater the danger that the real estate market could overheat and the real estate bubble could burst. Inflation-adjusted price growth has accelerated year-on-year despite the global recession. Markets with an index value above 1.5 are considered at risk. This category includes Zurich for the first time with 1.51. Real estate in Geneva (1.08) is also classified as overvalued, but the market is not considered at risk.
Home prices in the city of Zurich have risen by 70 %in the last ten years, significantly more than incomes or rents. Most new apartements are rented. Demand for condominiums still exceeds supply, especially in the city centre. Nevertheless, many experts believe that real estate prices are now maxed out and the risk of a market correction is increasing.
In Geneva, prices are lower than in Zurich and the risk of a bubble is lower. Home ownership is still attractive because interest rates are low - and will probably remain low for a long time - and market rents are excessive. In addition, Geneva is internationally oriented and still attracts many purchases from abroad despite high property prices.
COVID-19 has not slowed down price growth. For one thing, house prices are a lagging economic indicator and react with a lag. For another, most buyers have not yet had to accept wage losses or cuts in the first half of 2020 because financial bridge support such as the Corona loan has eased the burden on employers. This could change as soon as the outlook darkens again, state support expires, unemployment rises further or incomes fall. At the latest when household incomes fall, property prices in Zurich are likely to stagnate.
The risk has increased. The corona-induced economic slump could lead to falling property prices and rising affordability risks because mortgage borrowers earn less. Nevertheless, most experts rule out a real estate bubble, also in Zurich. On the one hand, because homeowners are doing everything they can to pay their interest and amortisations. On the other hand, because the Swiss National Bank and the banks have tightened the requirements for mortgage lending in recent years, for example with higher equity requirements and faster amortisation payments.
COVID-19 could change the demand. Many who have been working in a home office since March do not want to go back to the office or only on a daily basis. Some wonder whether they should move from the city to the agglomeration or to the countryside if they no longer have to commute. Especially if they earn less. Besides, cities like Winterthur have to save money and raise their taxes because of the Corona crisis. This is why demand in cities could at least stagnate, even if their attractiveness - jobs, education, leisure activities, infrastructure and culture - continues to convince many. For this to happen, the demand for residential property in suburbs and in the countryside would have to increase. But Corona will neither stop urbanisation nor trigger a flight from the city to the countryside.
Nothing, as long as you don't want to sell your house or apartement or don't need to extend your mortgage. If you do want to sell, you might get less money than at the peak, but probably still more than you paid for it. If you need to extend your mortgage, it could be that the bank, insurance company or pension fund will revalue your home. Even if the valuation is below the peak, it is still likely to be higher than the old mortgage. If the new valuation should be below the old valuation and you have mortgaged your house or apartement at 80 %, you will have to pay in more equity to meet the mortgage guidelines again. If your mortgage is due in the next few months, it is worth talking to your advisor early on.
If your personal conditions are still right and you earn enough in the medium to long term to meet the bank's affordability guidelines, home ownership is still worthwhile. Mortgage interest rates have risen slightly, but are likely to remain at a low level due to recessionary trends. At the beginning of October, the reference interest rates of key4 by UBS were between 0.52 and 1 %, depending on the model and term (basis: Canton of Zurich, loan amount 500,000 Swiss francs, affordability 24 %, loan-to-value 50 %, payment date 28 October 2020). It is unlikely that interest rates will rise in the foreseeable future because the central banks are keeping interest rates low to support the economy.
Despite the special situation in the city of Zurich, stable demand and thus stable prices can be expected throughout Switzerland. Large or luxurious houses and apartements are likely to come under pressure. This is also confirmed by the figures published by Fahrländer und Partner on 9 October: While condominiums in the lower price segment (up 1.5 %) and medium price segment (up 1.3 %) have become more expensive in the third quarter of 2020, prices for luxury flats have fallen by 3.7 %. Year-on-year, prices in all segments rose by 2.6 to 3.5 %. Prices for single-family homes increased by 1.8 % in the third quarter and are 6.1 % higher than a year ago. How prices will develop depends above all on how strongly and sustainably Corona will influence the economy. Thanks to the low capital costs, however, home ownership is and will remain affordable and a sensible alternative to renting.