Real estate market: gloomy outlook despite record valuations


The war in Ukraine is leading to rising raw material prices and supply problems. This slows down construction projects and makes them more expensive. © Keystone / Gaetan Bally

House prices are skyrocketing in Switzerland. But the war in Ukraine and rising interest rates threaten to reverse the trend.

This content was published on April 12, 2022 – 09:11

2021 was a record year for the Swiss real estate market. Total returns — including rental income and property changes in value — hadn’t been this high for real estate investors in seven years.

For years there has been only one trend in prices: upwards. Interest rates, meanwhile, remained low. For a long time, these conditions were ideal for buying a building or condominium as a value investment. Provided, of course, to be among those who could afford to pay high prices.

But at the end of February, the invasion of Ukraine by Russian troops negated all predictions. “With the Ukrainian situation, the deal has changed,” said Donato Scognamiglio of the real estate consultancy CIFI. The inflation risk, which we previously refused to recognize, is now present.”

A mild Covid crisis

The Swiss real estate market has weathered the recent crises well. “Since 1998 we have witnessed a succession of appreciations [du marché]summarizes Donato Scognamiglio. This even applies to the 2008 financial crisis.

“Unlike many other countries, Switzerland had not experienced a real estate boom before the global financial crisis, so there was no slump after that. On the contrary, residential real estate prices have risen moderately but unabated since then,” said Fritz Zurbrügg, member of the management board of the Swiss National Bank (SNB), at a recent conference in Geneva.

The corona crisis has not changed much in this situation. The market value of collective housing has increased by 4.1% in 2021 compared to the previous year and has never been higher.

The situation was more difficult in the commercial real estate market. Many retailers have faced losses as they have had to temporarily close due to the pandemic. And yet even commercial real estate in Switzerland saw a 2.7% increase in value in 2021.

Swiss real estate is among the most expensive in the world

The rise in property prices is not specific to Switzerland. From an international perspective, these are not rising very quickly, according to the OECD figures. Fritz Zurbrügg explains this international trend by the scarcity of real estate supply, increased demand for housing as a result of the pandemic and historically low interest rates in recent years.

If the rise in Swiss prices appears moderate in international comparison, Swiss real estate is one of the most expensive in the world, even if we factor in the average disposable income, which is high in Switzerland.

“The ghost is here”

Real estate is generally considered a safe investment. But in the current situation, the risks are greater. “Inflation will inevitably be followed by a rise in interest rates,” says Donato Scognamiglio with conviction. An increase in interest rates can lead to a significant decrease in property value. This would be particularly problematic for those who went deeply into debt to acquire one.

If borrowers can no longer repay their mortgages, banks are also at risk, warns the SNB. Switzerland, whose economy remains heavily dependent on the banking sector, would be particularly affected. In the current situation, banks would be vulnerable to a sudden rise in interest rates or a deterioration in the economic situation. “There are indeed signs of excessive valuations in the stock and real estate markets, and corporate and state debt levels are high worldwide,” explains Fritz Zurbrügg.

The war in Ukraine makes housing more expensive

Housing continues to be expensive, and not just because of record-breaking house prices. According to the Federal Statistical Office (FSO), about 60% of households in Switzerland continue to heat with oil or gas. The European Union shows comparable percentages on average. Switzerland – just like many European countries – is highly dependent on Russia for gas. The increase in heating oil and gas costs as a result of the war in Ukraine will therefore be felt by many people in Switzerland.

Renters will have to put in even more effort to find a home. As the Swiss job market is considered attractive and safe, immigration will increase, predicts the latest report from real estate consultant Wüest Partner. Ukrainian refugees in Switzerland will also need housing to rent.

Even before the Ukrainian crisis, the supply for tenants declined sharply. Due to the corona pandemic, people wanted more space, including for teleworking. According to the Wüest Partner report, the supply of rental housing has declined in the past twelve months, as it has not for nine years.

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