Home ownership: higher interest rates have an effect

Good news for anyone who dreams of owning their own home: the supply on the owner-occupied housing market is expanding. In addition, house price momentum slowed down significantly in 2023. House prices were 3.4 percent higher at the end of Q2 2023 compared to the previous year. These had risen by more than 5.5 percent in the previous year. The slowdown was particularly pronounced for single-family homes.

At the regional level, Central and Southern Switzerland recorded the strongest year-on-year increases in real estate prices as well as stronger price momentum than in the previous year. This indicates that demand for properties in the Alpine region remains robust. Whereas on Lake Geneva, house prices fell slightly over the last four quarters after rising sharply in the recent past.

Owner-occupied houses affordable despite higher interest rates

Despite the rise in mortgage rates, house prices remain affordable. The persistently high share of money market financing (SARON) indicates that buyers are optimistic and expect (key) interest rates to fall again in the long term. The possibility of deducting mortgage interest from taxable income also dampens the interest rate effect on demand for residential property, as it does not place such a burden on household finances.

The increase in mortgage interest rates has raised the financing cost of buying your own property. Therefore, it is to be expected that demand for residential property will remain subdued for the time being. We expect the Swiss National Bank to have completed its rate hike cycle with the last rate hike in June 2023. As a result, interest rates on money market mortgages are expected to remain at current levels over the next few months. However, according to our assessment, fixed-rate mortgages are becoming cheaper.

The decreasing financial attractiveness of buying a home leads to an increase in the available supply, which increases the scope for potential buyers to negotiate and puts pressure on prices regionally.

Slower development of real estate prices in the medium term

The risk of becoming unemployed is likely to remain relatively low over the next few years, as more people will retire than young people will enter the labor market. This generally supports the willingness to buy residential property. In addition, the Swiss labor market remains a magnet for foreign workers, which has a positive effect on the demand for housing. Nevertheless, we expect house prices to rise more slowly than rents, household incomes or general inflation in the medium term.

According to our forecasts, money market mortgages based on SARON will continue to be the cheaper option for financing residential property over a term of ten years compared to a ten-year fixed-rate mortgage.

Should you buy or rent real estate?

The decision whether to buy or rent your home depends on a number of factors, including your personal situation. It is not possible to give a general answer as to which is cheaper, as the financial burden depends heavily on the desired place of residence and on income tax.

Despite the current high real estate prices, residential property remains affordable for the middle class in most municipalities.

This is illustrated by this example calculation: with an annual household income of CHF 200,000, you can buy a home worth up to CHF 1.22 million with a loan-to-value ratio of 80 percent. With 120 square meters of living space, this corresponds to a price per square meter of around CHF 10,000. In around 83 percent of all Swiss municipalities, the prices of new, high-quality condominiums do not exceed this value.

However, those who are looking for a property in expensive regions such as Zurich, Geneva, Basel and Zug or a high-priced lake or tourist region will need a significantly higher annual income.