The Swiss real estate outlook for 2025 indicates a continued rise in prices, alongside new capital requirements for banks and potential changes to imputed rental value policies. This comprehensive analysis will provide valuable insights for investors and homeowners alike.
As we peer into the crystal ball of Swiss real estate, one thing appears almost as certain as the proverbial amen in church: property prices in Switzerland are poised for yet another ascent in 2025. The underlying catalysts for this upward trajectory include a persistently tight supply, coupled with both historical and anticipated interest rate reductions orchestrated by the Swiss National Bank (SNB). Furthermore, immigration trends are also playing a significant role in this dynamic landscape.
However, the horizon is not devoid of complexities. Regulatory and legal transformations, the potential abolition of imputed rental value, and heightened capital requirements for banks are set to dominate discussions among property owners and prospective buyers alike.
Key Developments on the Financial Front
In a notable shift, mortgages are becoming increasingly expensive due to new capital adequacy regulations. Effective January 1, 2025, banks will be mandated to hold a greater equity cushion for certain mortgage products, a decision ratified by the Federal Council and the Financial Market Supervisory Authority. This uptick in equity requirements translates to elevated gross margins for specific financing arrangements.
The crux of the matter lies in the loan-to-value ratio and the nature of the property in question. Homeowners with a low mortgage relative to their property’s value are unlikely to feel the pinch of these changes. Conversely, those grappling with a high loan-to-value ratio may find themselves facing increased risk premiums, manifesting as higher interest rates.
Moreover, it is conceivable that some banks may opt to decline transactions characterized by high loan-to-value ratios. The landscape is shifting, and those who find themselves outside the conventional lending framework may encounter significant hurdles in securing a mortgage. Particularly in the realm of apartment buildings and rental properties, the risk premium is expected to be pronounced for those with elevated loan-to-value ratios. Thus, landlords with substantial mortgages would be prudent to consider reducing their debt levels to enhance refinancing prospects.
The Price Ascendancy Continues
Data indicates that transaction prices for single-family homes and condominiums experienced an approximate three percent increase by the conclusion of the third quarter of 2024, as noted by Burak Er, Head of Research at Avobis Advisory. This upward trend is anticipated to persist, with 2024 projected to outperform 2023, during which single-family home prices rose by around 1.6 percent and condominiums by approximately 3.0 percent.
A pivotal factor influencing this price escalation is the role of banks in pricing dynamics: affordability regulations and the determination of collateral values are constraining buyers’ willingness to engage in the market.
Interest Rate Cuts: A Boon for Residential Construction
The ongoing interest rate reductions by the Swiss National Bank herald positive news for the real estate sector, particularly in the realm of residential construction. As financial support for housing development resurfaces, multi-family buildings are likely to remain a focal point for investors.
Interestingly, regional disparities in demand have narrowed since the onset of the COVID-19 pandemic, with a notable shift towards attractive locales outside urban centers, driven in part by the newfound flexibility of remote work. Claudio Saputelli, Head of Investment Global Real Estate at UBS, elucidates that while this trend is expected to persist, it does not necessarily diminish the allure of urban centers, which retain their economic vitality.
The Imputed Rental Value Debate
The contentious issue of abolishing imputed rental value has emerged as a hot topic within political circles in Bern. On December 19, the Council of States endorsed the introduction of a property tax on secondary residences, while the National Council previously advocated for the elimination of imputed rental value. This proposed overhaul aims to completely eradicate imputed rental value for both primary and secondary residences.
However, the timeline for this significant policy shift remains uncertain, as the new property tax is subject to a mandatory referendum, necessitating public and cantonal approval. Given the prevailing skepticism among various stakeholders, the path to implementation may be fraught with challenges. Should the imputed rental value be abolished, residential properties could become more appealing from a tax perspective, potentially driving up demand and, consequently, prices.
It is worth noting that this change would primarily benefit newer properties, while older properties may experience diminished advantages due to the non-deductibility of maintenance costs and major renovations. Property owners of older assets would be wise to consider proactive renovations to mitigate potential losses in tax deduction opportunities.
Mortgage Rate Dynamics
The Swiss National Bank’s decision to lower the key interest rate from 1.75 to 0.5 percent in 2024 represents a substantial reduction of 125 basis points. Market projections suggest one to two additional interest rate cuts in the upcoming year, potentially bringing rates down to 0.25 and 0.00 percent, respectively. This scenario bodes well for holders of SARON mortgages, as any reductions in key interest rates will directly translate to lower refinancing costs.
Conversely, the swap rates pertinent to fixed-rate mortgages have not experienced a commensurate decline, dropping from 1.28 to 0.42 percent in 2024. This disparity can be attributed to two primary factors: fixed-rate mortgages had already factored in anticipated interest rate cuts by late 2023, and the yield curve has normalized, thereby exhausting the potential for further reductions at the long end.
In light of these developments, a balanced approach incorporating both SARON and fixed-rate mortgages will likely remain the optimal strategy in 2025. Depending on individual risk tolerance, borrowers may choose to adjust the weighting of SARON versus fixed-rate mortgages accordingly.
Tenant Perspectives
While property owners may revel in the prospect of declining interest rates, the outlook for tenants appears less rosy. The reference interest rate, calculated from the average mortgage rates, is anticipated to decrease by 0.25 percent to 1.50 percent in March, enabling tenants to advocate for interest rate reductions. However, the future remains uncertain, as the significance of further SNB rate cuts on the reference interest rate may be limited given the current interest level.
Ultimately, the pivotal question revolves around whether interest rates will dip into negative territory once more. Should this occur, it could trigger a substantial downward shift across the yield curve, impacting fixed-rate mortgage rates and potentially leading to further reductions in average mortgage rates. While the possibility of renewed negative interest rates cannot be entirely dismissed, prevailing forecasts do not anticipate such a scenario in the immediate future. Thus, the reference interest rate is expected to stabilize at approximately 1.5 percent following the anticipated SNB rate cut in March.
The Swiss real estate landscape in 2025 is poised for a complex interplay of rising prices, regulatory changes, and evolving financial dynamics. Stakeholders must navigate this intricate terrain with foresight and adaptability to capitalize on emerging opportunities while mitigating potential risks.
