Real estate is a part of our everyday lives, but can it also be a financial investment?

The Swiss real estate cycle entered another round last year with home prices increasing by 3 percent. Many regions recorded price increases, with the highest levels of activity recorded in the urban agglomerations of Zurich and Geneva as well as parts of Central Switzerland. The secondary housing markets in the mountain areas even saw their highest price increase since 2012.

The increased number of people working from home was a major driver in this development. Living and work spaces have merged into one, a change expected to have consequences even after the coronavirus pandemic. As a result, communes outside traditional commuter zones – where overall costs are lower – will likely become more attractive places to live. Given the need for an extra room for a “home office,” the past year has seen demand rise for large properties, with single-family homes sought after in particular.

Price developments are favored by historically low interest rates, which will not change in the near future. The economy is expected to spring back to life, supported by an expansive fiscal and monetary policy, and the easing of regulatory coronavirus restrictions. However, the Swiss National Bank is unlikely to deviate from its negative interest rate policy, which will limit the risk of rising mortgage rates.

This means that money market mortgages, i.e., variable-rate financing, will likely remain the most attractive form of financing. Compared to ten-year mortgages, the difference is currently 30 basis points as of February 2021, with an increase in interest rates being hedged by fixed-rate mortgages. This is currently a very attractive option – both in historical and absolute terms. Potential exit costs should not be disregarded; a change in living conditions might mean that the mortgage has to be terminated early, for example. Personal circumstances and the need for security ultimately determine which mortgage solution is best.

You need to be able to finance your desired property. A household can, in theory, afford a property which costs up to six times its gross income. However, this is not enough on its own. Buyers often underestimate running costs when making their dream of home ownership a reality. This not only includes interest and mortgage repayments, but also maintenance costs. These costs can be estimated at around 1 to 1.5 percent of the value of the building. Even if you manage to keep costs below this amount in a given year, it would be wise to save for maintenance anyway, as your next big renovation could be just around the corner.

When selecting a property, it is a good idea to be mindful of location-related costs, such as your tax burden, health insurance premiums and real estate prices, as these vary considerably depending on the commune. The difference between the cost of 100 square meters of living space in the cheapest and most expensive communes is around 30 percent. Real estate prices tend to be higher in low-tax communes, which can completely negate any tax savings, especially for lower-income households. High-income households in particular stand to benefit from living in low-tax communes, as income taxes account for most of their location-related costs.

A good location is especially important if the owners want to rent out their property instead of using it themselves. The rate of vacant rental properties last year likely surpassed its previous high point of just under 3 percent, contributing to the 2 percent year-on-year decline in market rents. In regions with high vacancy rates and low population growth, the risk of not being able to rent out an apartment is particularly high.

In city centers and their agglomerations, in contrast, new living space has so far been absorbed by the high demand. Housing demand, however, could move into the expanded agglomerations, where an extra room costs the same but at the expense of 20 minutes’ more commuting time. Even renting out property could be somewhat shaken up by the higher number of people working from home.