Real estate market specialist IAZI sees increasing risks of a price correction, with investment properties particularly affected.
The turnaround in interest rates has finally put an end to an investment emergency, where the lack of alternatives drove insurance companies, pension funds, banks, and funds into real estate. That tide has fundamentally turned.
It's not just the interest rate environment or a slowing economy that is to blame. Falling stock valuations, bonds, and other investment opportunities are also acting as triggers. Particularly, investors with self-imposed, clearly defined, balances between asset classes in their portfolios are now running into problems, according to a real estate study from IAZI Wednesday.
Quota Ensures Higher Supply
Swiss pension funds are known to have substantial real estate investment. But an ordinance on certain pension plans relevant to these players prescribes a fixed quota for real estate investments not exceeding 30 percent.
Because equities and bonds have fallen sharply in value this year, portfolio balances are out of whack, with the real estate quota in some likely to increase beyond the limit. This will force pension funds to sell properties, which could lead to increased supply and falling prices.
«Of the pension funds, 25 percent will have to sell properties or devalue them,» says IAZI head Donato Scognamiglio. By doing so, they would have to accept a discount which occurs when the price or rate of a real estate investment fund lags behind its par value (NAV). Based on its data, prices are expected to fall in the fourth quarter and first three months of 2023,» by 3.4 and 3.1 percent, respectively, according to IAZI forecasts.
Friendlier Private Markets
The private homeownership picture is friendlier. The Corona pandemic has triggered a boom, especially for single-family homes, but owner-occupied home transactions indicate a slight price correction can be expected beginning in the fourth quarter of this year, especially for condominiums. Single-family homes will remain stable, with a sideways trend expected.
The turnaround in interest rates is making the situation more difficult for buyers. At over 3 percent, 10-year fixed-rate mortgages in particular cost considerably more than at the beginning of the year. There is a temptation to switch to relatively cheap Saron mortgages, although it is currently impossible to predict how high the Saron will rise if the Swiss National Bank (SNB) raises interest rates further to get inflation under control.
Rent or Buy?
The days when it was much cheaper to own a home because of low interest rates seem to be a thing of the past. To be sure homeowners will only feel the impact of this rise in costs when their mortgages expire or are renewed. In most Swiss communities, it is cheaper to rent an apartment than to buy a condominium. Continued high demand and falling vacancy rates will further drive rents higher.
