UBS Alpine Property Focus: Sharp price rises for second homes

Engadin/St. Moritz is by far the most expensive tourist destination in the Alpine region, as in previous years. An upmarket second home there costs around CHF 19,500 per square meter, almost 11% more than in the previous year. This is followed by Gstaad, where prices come in at CHF 17,000 per square meter. The Jungfrau region ranks third, with a current price level of just under CHF 16,000 per square meter. Second homes in Zermatt and Davos/Klosters also cost more than CHF 15,000 per square meter.

Steepest price rises since 2008

No region in the Alps posted falling prices for second homes in 2021—for the first time since we began collecting data 15 years ago. Prices for all Swiss destinations soared almost 10% year-over-year on average. This represents the sharpest rise in more than a decade. Arosa, Engelberg, Flims/Laax, and the Jungfrau region recorded the highest price increases at more than 15%. By contrast, prices in Adelboden/Lenk went up by less than 1%, making it the weakest region.

The mountains were enticing

Pandemic-triggered travel restrictions and requirements to work from home sparked a major run on vacation properties. The desire to own a home in the mountains was stoked up by the buoyant economic performance in 2021, as household incomes and assets also increased in parallel. With workplace and home no longer needing to be close to one another, many households decided to move their primary residence to the mountains. As a result, the population in the alpine cantons grew 1% in 2021, twice as fast as before the coronavirus pandemic. This meant that, for the first time in more than 15 years, population growth in the alpine cantons was greater than in all the other cantons.

Sold-out market

In accordance with the Second Home Act, the construction of new second homes has been generally not permitted in the tourist regions since 2012. Accordingly, only around 0.25% (primarily first homes) of the existing housing stock was approved for construction last year in the vacation destinations, the lowest level in many years. Another factor limiting supply is that, in recent quarters, many vacation apartment owners postponed a prospective sale, or even abandoned it, because they wanted to use the property much more often for home office purposes. Hence, the supply of available properties fell further. In the Grisons, Bernese, and Central Switzerland regions, less than 1.5% of the housing stock is available at present. Although the availability rates in Valais and in Vaud are much higher, averaging 6%, they are nonetheless well below the previous year’s level.

Excessive prices

The demand for vacation apartments should weaken given the high prices at present. The general rule is that the higher the price level, the smaller the group of potential buyers who meet the affordability criteria for borrowing. A simple example illustrates this: If a second home cost CHF 860,000 before the coronavirus pandemic, the price for that same home is likely now around CHF 1,000,000. At a loan-to-value ratio of 60%, an average of CHF 55,000 more for the down payment and CHF 20,000 more in annual income would now be required than before the coronavirus pandemic.

Interest rates have also risen sharply in recent months, resulting in the capital costs of acquiring a vacation home almost doubling since the start of the year. Maciej Skoczek, real estate economist at UBS GWM CIO and lead author of the study, commented, “Taking into account past rises in energy prices and potential further increases, the overall cost of using an average vacation apartment next year is likely to be a good one-third higher than before the start of the second-home boom in 2020.”

Illusion of value guarantee

Over the long term, the de facto ban on building second homes introduced by the Second Home Act may be a guarantor of value on the second-home market. Yet this should not obscure the fact that the legislation does not provide any protection against corrections of excessive prices, nor does it prevent fluctuations in supply. Indeed, the supply of second homes is likely to rise again in the course of this year. Some vacation apartment owners will take advantage of the current boom to realize capital gains and avoid the cost of upcoming renovation work. Foreign owners benefit additionally from the strong Swiss franc. There are also indications that local people are increasingly selling grandfathered homes as vacation homes, since an average premium of about 15% can be expected when selling a first home as a second home.

Skoczek expects price rises to slow down this year, remarking, “On average, second home prices in all Swiss vacation regions are likely to increase in the mid-single-digit percentage range in 2022.” Over the medium term, we can expect a greater supply of second homes to result in an adjustment of the current excessive prices.

Price overview of the destinations

Bars show the bandwidth of the prices for vacation apartments in the upmarket segment in thousands of Swiss francs per square meter.

UBS Switzerland AG