UBS study: prices and rents driven by housing demand

The UBS “Real Estate Focus 2024” real estate study sheds light on the latest developments on the Swiss real estate market and provides valuable insights into the trends and challenges facing tenants and homeowners. We have summarized the essential findings for you in the following article.

For many, the dream of home ownership is becoming a distant prospect

This is clear from the UBS real estate study: despite higher interest rates, which usually dampen demand for residential property due to higher housing costs for owner-occupied homes, prices for condominiums in Switzerland rose by almost 3.5 percent in 2023. Single-family homes cost just under 2.5 percent more than in the previous year. This trend is making the financial situation more difficult for many people, as purchasing a home is becoming unaffordable for more and more households.

Compared to 20 years ago, when 60 percent of households could still afford a medium-sized property, today the figure has dropped to just 15 percent. An average household is now only able to purchase a 4.5-room condominium at the median price in just under a quarter of Switzerland’s 106 economic regions.

Demand for owner-occupied homes has weakened overall due to high prices and the rise in interest rates. This is reflected, for example, in the lower number of search subscriptions taken out, which was last this low in July 2015. At the same time, however, the above-average growth in upper incomes is leading to additional demand for owner-occupied homes at increasingly higher prices. The immigration of skilled workers, who often have good salaries and bring assets with them, is boosting demand.

Rising prices away from the centers

On the owner-occupier market, there is a trend towards decentralized locations away from the major centers. More and more people are prepared to move to less expensive regions. The possibility to work from home has increased people’s willingness to commute longer distances.

The strongest price increases of up to 10 percent were recorded in the canton of Graubünden and in the Upper Valais. Prices rose at an above-average rate throughout eastern Switzerland, while in western Switzerland, the canton of Fribourg saw the sharpest increase in the price of residential property at around 4 percent. The major cities can be found at the other end of the scale. Prices even fell slightly in the Geneva and Basel regions.

Hope for falling usage costs

Living in your own home has become more expensive in the past year. The increase in running costs comprising mortgage interest, maintenance and imputed rental value was a key factor. While these usage costs amounted to around CHF 17,000 in 2021 for a condominium costing CHF 800,000, they are currently a good 50 percent higher, at around CHF 26,000 per year.

A further drop in interest rates is anticipated, which should ease the situation slightly. Lower usage costs for owner-occupied homes should make this option more attractive again compared to renting an apartment.

In contrast to usage costs, there is little prospect of a drop in real estate prices. The high prices are currently being maintained by the low supply of houses and apartments available on the market. New buildings are expected to be of little relief – there was a further decrease in the number of building permits granted in 2023. In 2024, the number of condominiums available is expected to increase by just 0.8 percent, and the number of single-family homes by 0.5 percent.

Home prices are likely to rise slightly by 1.5 percent (apartments) and 1 percent (single-family homes) in the current year. Higher price momentum is expected from 2025 onwards due to the economic situation.

Increase in rent and demand

What is the situation in the rental apartment sector? It is clear from the study that rents are rising. Last year, quoted rents climbed by almost 5 percent in relation to the previous year. This is the strongest increase in 15 years.

Demand for housing has grown by an average of 1.3 percent per year over the last ten years. Immigration and the rise in the formation of households have contributed to the boom in demand for rental apartments. The increase in demand for housing led to a decline in the vacancy rate for rental apartments from 2.7 percent to 1.7 percent between 2020 and 2023.

Conurbations are becoming more attractive

It is not just the major centers that are attracting a continuing influx of tenants. Municipalities on the outskirts of conurbations are also becoming more attractive, as tenants can save considerable amounts on rent by relocating. This trend, which is bolstered by remote working options, is particularly evident in the Zurich area: after a ten-minute drive, quoted rents are a fifth lower than in the cantonal capital. After 20 minutes, they are a third lower, and after 60 minutes, half as low.

From an investor’s point of view, this increases the attractiveness of the surrounding municipalities. Falling vacancy rates and rising rental income mean a lower risk for investments. The transaction costs for project development and regulatory risks are often lower in smaller municipalities than in big cities.

Conclusion and outlook

Overall, the “Real Estate Focus 2024” study makes it clear that fewer and fewer households are able to realize their dream of owning their own home, while demand for rental apartments is growing steadily and rents are rising. The prospect of a further fall in interest rates and a possible slowdown in price increases promises some relief on the home ownership market. It is currently unlikely that the boom will be revived as it was during the pandemic.