Why is Zurich at risk of a real estate price shock ?
Along with Geneva, Zurich is Switzerland’s most expensive city, also in terms of property prices. As things stand, there is a risk of a real estate bubble, a new report warns.
A bubble occurs when the price of housing rises quickly and significantly, driven by an increase in demand and limited supply.
This can be said of the property market in Switzerland’s largest city, where “home prices have gained roughly 20 percent since the start of the pandemic, slightly outpacing the national average".
This is the finding of a new UBS Global Real Estate Bubble Index released on Wednesday.
The phenomenon is called a ‘bubble’ because at some point — when interest rates go up and demand drops — it will burst. When it does, prices fall, which is a positive development for those looking to buy a property, and not so good for people trying to sell.
UBS experts rated Zurich as being at a ‘high’ risk of a real estate bubble — the city is in the third place (after Toronto and Frankfurt) in terms of its bubble risks. Overall, out of 25 cities that UBS analysed, nine are in the high-risk category.
Why is Zurich at high risk?
“The combination of negative interest rates and strong economic and population growth have triggered excessive price increases over the last few years", UBS said.
However, this is no longer the case, at least in terms of interest rates: the Swiss National Bank (SNB) raised the key interest rate by 0.75 percentage points in September, which means mortgages will likely go up to 3 - 4 percent, from the current 2.6 - 3.1 percent.
As the report put it, “the high purchase prices will be subjected to a reality check by the interest rate hikes of the Swiss National Bank. From a pure cost perspective, renting is significantly cheaper than buying at currently elevated interest rates. As rates rise further, the supply of property for sale is likely to increase in the medium term as well".
Does this mean buying a house in Zurich will become cheaper once the bubble bursts?
This may indeed be the case, though the word “cheaper” should not be taken literally.
The average price for a square-metre of a house or apartment in Zurich costs just over 15,000 francs.
While this price may fall somewhat, the drop will not be significant enough to make the cost affordable for most people.
The reason comes down to demand: Zurich continues to attract new residents, both Swiss and foreign, because it is a large economic centre and it offers high salaries, as well as a quality of life that is among the highest in the world.