Boom pushes property market to the limit

A full moon and a full house in Zurich Ex-press

Rising rent and property prices plus lower returns for investors: the Swiss property market is booming and reaching its limit with the situation tensest in the cities.

“The market’s always been tight – there’s nothing new there,” Regula Mühlebach, head of the Swiss Tenants Association, told swissinfo.ch.

“What’s serious are the so-called mass evictions, when entire multi-family apartment blocks are given notice so the building can be renovated and profits maximised.”

Donato Scognamiglio, head of property consultants IAZI, said rent for apartments in Geneva was going up by an average of 13.5 per cent a year – “purely because the property is back on the market”.

“In Neuchâtel it’s 12 per cent and Zurich 6.3 per cent,” he said. In cantons Aargau and Solothurn, however, the difference between existing and new leases is only one per cent.

Scognamiglio was referring to a survey carried out by his firm into the Swiss property market and the rate of turnover of tenants who decide to move.

“When tenants leave the haven of rental law, they’re exposed to the storms of the market,” he said.

Split market

Moving house can be expensive in cities in particular. Loyal tenants on the other hand pay on average only seven per cent more than they did ten years ago, according to Scognamiglio.

The real estate firm Wüest & Partner said in its latest market report that the rental market was “split”.

“While the quoted rents have gone up in all market regions over the past quarter, property rents have remained stable or even decreased a little as a result of being linked to the fixed reference rate,” the report said.

It predicted this trend would continue as long as mortgage rates remained at the current low level. 

The house market is most tense around Lake Geneva, in the city of Geneva, Zurich, Upper Engadine and in the city of Basel.

In rural areas, for example cantons Uri and Jura, the situation is more relaxed.  However, this is limited consolation for the tenants association, since “70 per cent of the population live in cities and big built-up areas”, said Mühlebach.

Not pretty vacant

According to a federal court judgement, Switzerland must have a rate of vacant accommodation of at least two per cent, for the market to function.

But on June 1, 2011, the rate across the country was just 0.94 per cent. In the city of Zurich only 57 apartments were vacant.

Mühlebach described this as “an economically and socially serious development” which would lead to “landlords completely exhausting the market possibilities when tenants move”.

Rate rises of “13 per cent or more” were normal, she said, adding that in many cases it was a lot more.

Her association is therefore demanding greater state intervention in public-interest construction and planning measures, for example a regulation that would force communes to reserve a certain proportion of its building zones for public-interest construction.

Investor gloom

At the same time, the property boom and demand pressures are leading to rising prices for income properties – those properties, residential or commercial, which are
bought or developed to earn income through renting, leasing or price appreciation.

“Investors are suffering,” Donato Scognamiglio said. “We’re in an investment crisis because there are hardly any items on the market. Value has gone up by 40 per cent in ten years.”

He said the temptation was large with pension funds to add to one’s portfolio properties with gross rates of return of four per cent, in other words with a poor return. In 2009, average gross return was still 6.6 per cent.

Things are looking better for owner-occupied apartments and one-family houses, whose prices, according to the IAZI report, have increased over the past 12 months by 6.5 per cent and 5.8 per cent respectively.

Here too regional differences are considerable, with prices for existing one-family apartments going up by 20 per cent in the city of Zurich and new apartments by 90 per cent during the same period.

Bubble?

Warnings of a potential property bubble have been gathering for some time.

The ratings agency Moody’s recently took the Raiffeisen banking group down a notch because of its “aggressive growth in the mortgage-lending sector”.

Moody’s added that the mortgage market showed “early signs of overheating in certain regions”.

Oliver Würsch, head of strategic foundations at the Swiss financial market regulator (Finma), said there was still no need to panic concerning the mortgage market.

Nevertheless, he said Finma was alarmed for various reasons.

“Instead of stepping on the brake, the banks are currently hitting the accelerator,” Würsch said, adding that for the time being there was no systematic overview of the Swiss mortgage market.

“For this reason monitoring must be improved,” he concluded.

“Highly political”

Würsch said some banks have already become more careful and changed their strategies: in the boom regions in individual cases they were demanding higher capital requirements and making reductions in the current market value.

Other banks on the other hand were in certain cases lowering capital requirements from 20 to 15 per cent.

Würsch described the implementation of the capital requirements or higher capital ratios as a “highly political issue”, the regulation of which lay with the cabinet.

Monitoring report, autumn 2011

According to Wüest&Partner, immigration is one of the main reasons for the unabated demand for housing.

The impact has been more varied than initially expected. While it is true that many of the new immigrants are well-qualified, only a portion of them are managers looking for a spacious city apartment or a lakeside villa.

Also, the rapidly growing number of foreign students has increased the demand for affordable housing in university towns.

Border-crossing workers have also had an effect on the market. In Geneva, for example, the planned railway line to Annemasse, France, will encourage the region’s housing market to continue to grow on both sides of the border.

Overall, the Swiss property market has shown no obvious weaknesses despite the debt crisis, the strong franc and the turbulence on the stock exchanges and capital markets.

Housing shortage

According to the Federal Statistics Office, the region around Lake Geneva is the most difficult for finding accommodation.
 
In 2010 the rates of vacant accommodation were as follows:
 
Lake Geneva region: 0.57%
Zurich: 0.63%
Central Switzerland: 0.71%
Ticino: 0.72%
Northwest: 1.09%
East:1.28%
Plateau: 1.32%

(Translated from German by Thomas Stephens)