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EXPLAINED: How inflation is increasing housing costs in Switzerland

Property is not exempt from inflation. Here's how costs are on the rise in Switzerland.

EXPLAINED: How inflation is increasing housing costs in Switzerland
The costs of housing are going up in Switzerland. Photo: Pixabay

First, the (somewhat) good news: The inflation rate in Switzerland —  2.6 percent  — is significantly lower than in neighbouring France (5.4 percent) and Germany (7.8 percent), as well as throughout much of Europe.

But even with the relatively low inflation, prices of many consumer products have been rising, with economists forecasting further hikes.

READ MORE: Seven products that are becoming more expensive in Switzerland

While you might notice the impacts of inflation when you buy groceries, consumer goods, food and petrol, inflation is also making a mark on the housing market.  

How is the housing market impacted by this phenomenon?

The impact on housing is indirect, which can be likened to the ‘domino effect’ — as the price of construction materials derived from petroleum, such as plastic, have risen, so has the cost of newly built houses and renovation work on existing properties.

Rents and mortgages are also impacted, although there the mechanism may be a bit complex to understand by non-experts. 

As Vincent Leroux, president of SVIT Romandie, the Lausanne-based section of the Swiss Association of Real Estate Economics, explained to Tribune de Genève (TDG), the “central bank have a particular mission to control inflation”.

To do this, it has the option of raising its key rate. When it does, the interest rates of financial institutions follow and rise in turn. The purpose of the maneuver is to reduce the use of credit, and to slow down the level of consumption and the upward trend in supply prices. But, if interest rates go up, rents can go up – as can the interest cost of a mortgage. 

EXPLAINED: How to save on your mortgage in Switzerland

This is the general picture, but what happens if you are a tenant?

All tenants are, or will soon have to, pay higher rents, according to Pierre Stastny, a lawyer at The Swiss Tenants Association (ASLOCA) in Geneva.

The determining factor is when the lease was signed and what the reference rate — weighted average interest rate for mortgages in Switzerland, announced by the Federal Housing Office each quarter — was at the time.

Those who rented their properties at a time when the reference interest rate was low could see their rents increase by 3 percent, Stasny said.

Those who contracted a lease whose rent is indexed to inflation will also see their costs rise.

This is because “the lease law authorises landlords to add 40 percent of the inflation rate to the rent”, Stasny pointed out. “But if the lease is signed for five years or more and the contract contains an indexation clause, the landlord can then pass on to the tenant the entire inflation rate.

How are homeowners affected by inflation?

According to Stéphan Mischler, director of mortgage and real estate platform MoneyPark, it depends on whether you are a first-time buyer, whose mortgage loan is in progress, or non-first-time buyers, who have settled their mortgage.

The former group is most at risk, money-wise.

“With inflation, the ten-year fixed interest rates, which are most often chosen in Switzerland, have started to increase: they have doubled and currently vary on average between 1.8% and 2.5%, compared to around 1% a few months ago”, Mischler told TDG.

“As a result, this doubles the interest cost of a mortgage for those who are currently looking to buy their home or for those who have recently taken out a mortgage.”

However, current owners could also be affected if they have to renew their mortgage in the near future.

Logically, this chain of events will also have repercussions  on potential buyers, as they may not be able to afford higher mortgage rates.

Other housing-related costs have risen in Switzerland as well. For instance, energy, including gas and electricity used by households, will  take a bigger chunk out of an average family’s monthly budget.

READ MORE:  How Covid, Ukraine and energy costs are changing Swiss spending habits

What exactly is inflation and what causes it?

Simply put, it is an increase in the prices of consumer goods and services, causing some loss of purchasing power. In other words, while our wages mostly remained the same, the cost of living went up, and is expected to continue to increase for at least the foreseeable future.

This trend started in mid-2021, as world economies recovered from the Covid pandemic, and Switzerland rebounded better than many other countries. However, with many supply chains still disrupted and struggling to meet consumer demand, prices began to rise.

The situation has worsened since Russia’s invasion of Ukraine on February 24th, which also slowed down or shut down altogether the production and supply of some essential agricultural and energy products, leading to higher prices.

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COST OF LIVING

EXPLAINED: Why Switzerland’s cost of living isn’t as high as you think

Yes, Switzerland is expensive, but if you analyse things from a different angle, at least some of the country’s prices don’t look quite as bad.

EXPLAINED: Why Switzerland's cost of living isn't as high as you think

In almost all the international cost of living rankings, Switzerland comes near the top. Sometimes it competes for the “winner’s spot” with Nordic countries like Norway or Iceland, but any way you look at it, you need lots of money to live here comfortably.

Have you ever heard anyone (other than possibly multi-millionaires) saying “Hey, let’s spend our vacation in Switzerland. It’s really cheap there”.

There is a number of reasons why the country is so costly, which are detailed in this article:

EXPLAINED: Why is Switzerland so expensive?

But if you look beyond the sheer statistics, Switzerland does not fare quite as badly – particularly as a place to live. 

Here’s why Switzerland isn’t as expensive as we may think. 

Inflation rate

The Covid pandemic and the war in Ukraine have pushed worldwide inflation rates upward.

While in Euro zone countries this rate stands at 8.1 percent as at May 31, in Switzerland it is a much lower 2.6 percent.

There are many reasons why Switzerland is withstanding inflationary trends better than other countries — at least so far — including the strong franc, which makes imports (though not exports) cheaper.

While prices here are going up due to reasons cited above, the increase is not as drastic as elsewhere in Europe.

READ MORE: EXPLAINED: Why Switzerland has escaped the global spike in costs of living

Strong economy

Overall, the strength of Switzerland’s economy, which withstood the pandemic much better than other countries, is worth its weight in gold —and not just literally.

“Even in a time of crisis, Switzerland scores thanks to its stability, predictability and security”, said Patrik Wermelinger, member of the executive board of Switzerland Global Enterprise (SGE), which promotes the country abroad on behalf of the federal government and the cantons.

Right now Switzerland’s unemployment rate is just over 2 percent, while it is 6. 8 percent across the EU. Looking specifically at neighbour countries, it is 7.3 percent in France, 8.4 in Italy, 5 percent in Germany, and 5.7 percent in Austria.

What exactly does all this have to do with the cost of living in Switzerland?

The country’s resilience to global crises means people remain employed, and employed people can afford to buy at least the basic necessities.

Right now, “the market situation is very positive for employees…Skilled workers are scarce and the shortage cannot simply be filled by workers from neighbouring countries”, according to Peter Unternährer, Manpower’s regional director for central and eastern Switzerland.

READ MORE: Employment: This is where Switzerland’s jobs are right now

High salaries

Okay, so your monthly income per se means nothing unless you convert it into its purchasing power.

In Switzerland, high wages are eaten up by high prices — at least that’s what many people will tell you and we won’t argue with that.

But wait before you jump to this conclusion, let’s talk about McDonald’s and its Big Mac burger (yes, you heard us right — a Big Mac burger).

The Economist magazine’s Big Mac Index is a globally accepted metric which compares how much this burger costs in every country.

Not surprisingly, this sandwich costs most in Switzerland ($6.98 = 6.71 francs).

However if you take a minimum hourly wage, say 20 francs, an average worker could buy three burgers for his hourly wage.

As a comparison, in the USA, where the Big Mac costs $5.81 (again, according to the index) but the median minimum salary on federal level is $7.25 per hour,  an average worker could have just over one burger for an hour’s work. 

All this is to say that things are not always what they seem.

Some things in Switzerland are (comparatively) cheap

Although “Switzerland” and “cheap” should never be used in the same sentence, the fact is that some things here are actually reasonably priced.

For instance, the Value Added Tax (VAT) is 7.7 percent here, while it is much higher throughout Europe, as the  chart below shows.

Tax Foundation screenshot

Because of that, prices of some goods, like electronics, are lower in Switzerland than in many European countries.

Also, the tuition fees at Swiss universities are low by the standards of many other countries. At the prestigious ETH technical institute in Zurich, for example, tuition and semester fees total 649 francs a semester.

And let’s not forget about taxes.

According to Moneyland.ch consumer website, “The average resident of Switzerland spends 10.7% of their income on income tax according to OECD estimates. For the sake of comparison, income tax eats up 14.8% of the average French income, 16.9% of an average Dutch income, 18.3% of the average U.S. resident’s income, 19% of the average German’s income, and 36.2% of the income earned by the average resident of Denmark”.

READ MORE: 13 things that are actually ‘cheaper’ in Switzerland
 

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