Real Estate Market 2013
Switzerland’s real estate market is being closely scrutinized and some sections of the media are warning of a real estate bubble like the one experienced by the USA and Japan in the 1980s and 1990s. Economists of the Bank of Japan recently carried out a real estate market analysis for various European countries putting the long-term demographic trend, the development of real estate prices and lending into context. Switzerland was not part of the research done by the Bank of Japan economists, but Swiss media do believe that the results of these analyses can be extrapolated to apply to Switzerland.
Real estate prices in Switzerland are at a high level, and on the rise. The prices for condominiums have now reached their highest ever level while the prices for single family detached houses are now somewhat below their highest level, which they reached in 1989. Overall, however, real estate prices have risen by 30% in the last ten years. In contrast, mortgage interest rates in Switzerland have – for quite some time now – been on a historically low level. This makes real estate look affordable even though the real estate prices are rising. As a consequence, the credit volume has reached new historic heights as compared to the gross domestic product (GDP). This fact suggests that, when applying the analysis by the Bank of Japan economists to the Swiss real estate market, there is a risk of a real estate bubble. In Switzerland, this risk would be most present in urban centers, namely in Zurich and Geneva.
Countercyclical Capital Buffer Activated
Due to the real estate development described above, the Federal Council (Swiss government) activated the countercyclical capital buffer in February 2013 at the request of the Swiss National Bank (SNB). The countercyclical capital buffer has the purpose of strengthening the banks’ capital base. The measures taken will increase the capital requirements of banks associated with residential mortgage loans. The goal is to strengthen the banking sector’s resilience when changes in the real estate market occur. This approach is also expected to have a dampening effect on the dynamics of mortgage lending and therefore also on the dynamics of real estate prices. This will allow to weaken the consequences a real estate bubble could have. The Swiss National Bank had requested for this action to be taken by the Federal Council because an increase in lending and real estate loans had been observed over several years, which had created imbalances on the residential mortgage and real estate market. Based on the increased imbalance in 2012, SNB considered that the stability of the banking system and thus of the Swiss national economy was exposed to a greater risk. The countercyclical capital buffer will be in effect as of September 2013. It remains to be seen how effective the countercyclical capital buffer will turn out to be in practice, since this preventive measure is new and has not yet been tested under real life conditions.
Swiss Building Index
Despite the increased risk of a real estate bubble in Switzerland and the use of preventive measures, the Swiss building index forecasts a stagnation for the first quarter of 2013. The Swiss building index is assessed and published by the Swiss master builders’ association (Schweizer Baumeisterverband) on a quarterly basis. Since 2004, this index has been on a continuous rise, starting out at just under 100 points, now having reached a level of 132 points, while it was even at 137 points in the third quarter of 2012.
Major Foreign Investments in the Tourism Sector
The unrelenting rise in investments in major tourism projects in Switzerland by foreign financiers seems to be continuing. Most notable are the major residential building and hotel projects in central Switzerland around the Lake Lucerne. The Chateau Gütsch Hotel in the city of Lucerne had been purchased by a Russian oligarch in 2010 and is to be remodeled and extended to the tune of CHF70 million. The famous resort town Vitznau at the Lake Lucerne saw its Park-Hotel just reopen after renovations valued at CHF300 million. The investor is Peter Pühringer, one of the richest men in Austria. The Egyptian businessman Samih Sawiris, through his real estate group Orascom, is in the process of developing a holiday resort in the Andermatt hamlet at the foot of the Gotthard mountain pass in the Canton of Uri with a total investment sum of CHF1.8 billion. This project includes not only 500 triple-A holiday apartments in 42 buildings, 25 villas and 6 hotels, but also the modernization and expansion of the ski facilities around Andermatt. Another project in its realization phase is the reconstruction of the world famous Bürgenstock Resort in the vicinity of Lucerne. The state of Qatar is building a new resort complex with 3 hotels, 2 suite hotels offering 67 residence suites, 12 restaurants and a golf course, with an investment of about CHF500 million. The foreign investments in these major residential and hotel projects will not only allow the building sector to run at full capacity, but will, together with lending at low rates, also encourage private sector residential building around these new hotel projects. The region surrounding the Lake Lucerne has seen an annual rate of population growth of 12% on average during the last three years. The effect on the real estate market is a shortage of housing supply, which is another cause for the rise of real estate prices.
Second Home Initiative
On January 1, 2013, a new regulation concerning second homes entered into force. This new regulation is based on a decision by Swiss voters and has the purpose of regulating the building of second homes. It aims at avoiding residences remaining empty for most of the time. A second home is defined as any apartment or house that is not used on a permanent bases by either a person residing in the community or for business or training/educational purposes. The dwellings concerned by the initiative are located in the southern part of Switzerland and in the region of the Alps, with the cantons of Ticino, Graubünden and Valais being most affected. The newly passed regulation affects only the construction of new homes and has generally no effect on existing homes or those for which non-appealable permits have been issued. The new regulation will cause a price increase for these second homes. The prohibition of building second homes is applicable only to communities where such dwellings make up 20% of the total number of homes. However, the prohibition applicable as of this threshold does restrict housing supply and thus the housing market. The acceptance of the second home initiative is also a threat to the work force in the construction and real estate sector with an expected loss of about 8,000 jobs.