People who buy a house want their own home, but they also want to make a good investment. In the latest issue of Immo-Monitoring, Wüest & Partner examine whether buying a home is actually worth it.

According to Wüest & Partner, the total return on a self-occupied home is made up of the indirect income (revaluation return) and the direct income (cash-flow return).

Macro-location determines the revaluation return

The revaluation return on a property is based on the difference between its market value at two separate points in time. In the last 25 years, the revaluation return on single-family homes varied between 1.7% for simple properties and 2.3% for up-market properties. For flats, the range was 1.7% to 2.8%. Better equipment and fittings increase the revaluation return, but contribute to higher fluctuation risks. Moreover, there are strong regional variances in revaluation returns. Between 1985 and 2010, certain owner-occupied flats in the Oberengadin and Geneva areas had revaluation returns of 4.5% per year. For owner-occupied flats and one-family homes as a whole, the regions of Geneva, Nyon and March take the lead, regardless of quality and equipment and fittings. The lowest revaluation returns are in the Bernese Jura and the Domleschg area with an annual nominal growth of only 0.1%. If inflation were taken into account, growth would actually be negative. In conclusion, the significant differences in returns on owner-occupied properties in Switzerland are mainly due to the revaluation component which is strongly influenced by the macro-location.

Capital gains tax leads to corrections in revaluation returns

Property capital gains are taxed differently from one canton to another. This leads to unequal corrections in revaluation returns. In this context, it is not just the capital gains that count but the term of ownership. The correction is most important in the cantons of the Grisons, Basel-Country, Appenzell Inner and Outer Rhodes, Lucerne, Zurich, Basel-City and Nidwalden where capital gains tax reduces the revaluation return by between 0.2 and 0.5 per cent. The effect is lowest in Geneva. On the one hand, the Geneva area has witnessed the highest revaluation gains of all cantons in the last 25 years. On the other, capital gains are exempt from taxation if the seller owned the property for at least 20 years.

Direct return has subjective components

While the indirect return is determined by the market trend for owner-occupied properties and can be objectively established, the direct return is determined by subjective components. To measure the “perceived” return in monetary terms, two assumptions must be made. First, the use of the self-occupied home for the owner based on the opportunity cost of renting a comparable unit. Secondly, the cost of running and maintaining the property at market prices: these include garden and home maintenance costs. Then there are charges, insurance premiums, reserves and other monetary costs. Under those assumptions, the average direct return for Swiss owner-occupied properties can be extrapolated. For single-family homes, the range is 2.1% to 2.5% and for owner-occupied flats the range is 2.1% to 2.4%. Conversely to the revaluation return, the direct return varies only slightly based on the term of ownership and the geographical location.

The overall return depends on the property and location

According to Wüest & Partner, capital gains can only be realised with self-occupied property if you choose the right property in the right location. Disregarding financial strategies, overall returns vary between 3.8% and 5.2% on average in Switzerland depending on the market segment. There is no significant difference between houses and flats. The report also considered the inflation protection aspects of home ownership. The findings were negative. Whether and to what extent home-ownership offers built-in asset value protection depends primarily on the macro-location. The greater the proportionate value of the land in the value of the property, the greater the asset value protection. Moreover, owner-occupied homes always offer cost-inflation protection, regardless of location, since owners are immune to the rental increases which generally accompany inflation.