According to the Credit Suisse (CS) real estate monitor for the 2nd quarter 2011, immigration is the main element driving the current above-average population growth rate. With the recovery of the labour market, the falling immigration trend of the last two years has been reversed.
Immigration on the rise again
Immigration is expected to grow at a rising pace in the current year. For this year, Credit Suisse is forecasting a positive migration balance of nearly 70,000 people or 9% more than last year. The first statistics clearly confirm this forecast. Demographic growth in Switzerland is likely to be above-average this year. In conjunction with the favourable interest rate environment, this should sustain the demand for housing despite little support from household income.
Interest rates to remain low
In June, the Swiss National Bank (SNB) decided to abstain from increasing its discount rate given the sustained strength of the Swiss franc. According to CS, the strong Swiss franc will probably also dissuade the National Bank from deciding any future interest rate increases. It is increasingly likely that interest rates will not be raised at all this year, despite the fact that the SNB diagnosed the real estate market situation as being the main risk apart from the strong franc. Floating rate mortgages will not increase until key interest rates rise. Over a twelve month horizon, CS expects interest rates to increase by 75 base points.
Medium and long-term mortgage rates have already recovered from their record lows. Rates may stall, however, following short-term fluctuations as was the case in the wake of the euro sovereign debt crisis (Portugal and Greece). Over the same twelve month horizon, the rate for fixed-rate mortgages is expected to increase between 60 and 80 base points depending on mortgage maturities.
Immigration hinders excess supply on the housing market
According to CS, the housing market is characterised by long production times. Investors regularly overestimate the demand for housing which tends to result in surplus supply and growing vacancies at the end of a housing construction cycle. The last real estate cycle was an exception. The immigration wave triggered by the agreement for the free movement of persons signed with the EU prevented the usual end-of-cycle surplus.
The favourable framework conditions for home purchases this year is contributing to sustain the demand for residential property. Credit Suisse therefore expects to see an ongoing transfer from tenancy to ownership. Supply and demand are generally expected to follow a similar trend contributing to the continued stability of the Swiss residential real estate market. For 2011, CS expects the slight relaxation to continue. The new apartments arriving on the market in greater number than the previous year will be offset by a more or less stable surplus demand. CS forecasts a surplus of about 3,000 vacant apartments which would result in an apartment vacancy rate of nearly 1%.
Higher growth in prices in the 1st quarter
According to Credit Suisse, prices for apartments rose further in the 1st quarter of the year. On average, the median price for a mid-market apartment rose 8.6% compared with the prior year. From end 2004 to end 2009, prices increased by some 5.6% per year compared with 6.1% in 2010. The growth rate accelerated anew in the 1st quarter of 2011.
Prices should flatten out in the next quarter
Nationwide, Credit Suisse does not regard the Swiss real estate market as overheated although the temperature is too high in some regions. The increased production of residential housing, which has grown significantly owing to the excellent financing terms and conditions, will result in faster growth in the residential housing stock dampening prices in the medium- term. CS anticipates that the recently observed price growth will flatten out in the next quarter in the absence of any further accelerating effects.