Few things are as suitable for wealth accumulation and retirement planning as home ownership. If home ownership becomes unattainable for the majority of the population, this leads to massive distribution effects. That shouldn’t matter to politicians.
More expensive from year to year: condominiums and currently especially single-family houses.
Fewer and fewer people in Switzerland are able to fulfill their dream of owning their own four walls. This has to do with home prices, which have been rising much faster than incomes for a long time due to strong immigration and the comparatively scarce supply. But it is also a consequence of the rigid regulations that banks have to apply when granting mortgages.
In fact, despite the rise in house prices, many households could still afford to own a home. Because mortgages are still dirt cheap at the moment, buying is usually cheaper than renting. But the standardized criteria for calculating affordability completely ignore the sharp drop in interest rates. Only those who earn so much that they could easily pay four and a half to five percent interest can get a mortgage.
Antisocial or Necessary?
It is undisputed that the financial hurdles on the way to home ownership have increased. Opinions differ on how problematic this is. Some find the current conditions anti-social. They argue that soon only the well-to-do, who would have no problems getting credit, would be able to live cheaply thanks to the low mortgage interest rates and still be able to benefit from the boom in prices on the real estate market, while ordinary people would have fewer and fewer of these options.
For the others, the exclusion of more and more groups from the home ownership market is not a problem, since home ownership is “not a human right”. In her opinion, the rigid requirements for granting mortgages are necessary in order to protect less wealthy households from taking (too) a large concentration of risk when buying a property on credit.
Not only risk, but also opportunity
In fact, owning a home is often by far the largest investment in a household. So there is a lump. But whether the associated risk is justifiable for a mortgage borrower can best be clarified with a differentiated individual case analysis. This raises the question of how sensible it is if the banks – as is currently the case – have to more or less lump all households together. A strong relaxation for everyone would certainly not be appropriate, but there should be solutions that allow a little more flexibility, especially for younger families.
In addition, home ownership is not only a risk, but also an opportunity, for example for capital formation or for old-age provision. Due to demographic aging and low interest rates, making provision for yourself is becoming more and more important, and owning your own home is a good way to do this. On the one hand, the housing costs in old age can be reduced by means of amortization. Second, it’s a relatively stable asset, especially if you can hold it for a long time. In Switzerland, for example, there are probably few homeowners whose house or apartment is worth less than when it was bought. It should be different for holders of UBS or CS shares.
Real estate ownership is encouraged, home ownership is not
To argue that there is no right to home ownership, which is why everything should remain the same, misses the point. Of course, it would be dangerous to give all households access to large investments financed by credit. Nobody wants to build up a “subprime” segment in Switzerland, as was the case in the USA before the outbreak of the financial crisis.
But when even an impressive household income of 130,000 francs is no longer enough to buy a medium-sized condominium, the advantages of home ownership – i.e. low housing costs and the opportunity to accumulate wealth – become a privilege of the rich. The associated increase in inequality in the population is a social problem with explosive power.
Free money fuels demand for credit
With that in mind, it might be time to take a slightly different look at the home ownership market. For around a decade, the aspect of financial stability has been the main focus of public debate, while questions of distribution are mostly ignored. At the same time, the competent authorities do not seem to consider it necessary to once again review the adequacy of the previous prescriptions for safeguarding financial stability.
One cannot expect the Swiss National Bank (SNB) to think about the distributional effects of its monetary policy, even if these are enormous. Its mandate is price stability, and it is also intended to contribute to the stability of the financial system. However, the monetary watchdogs could admit a little more openly that it is primarily the low interest rates that are fueling asset prices and not banks or home buyers who are too willing to take risks.
After all, if credit is almost free, what else can we expect but that demand for it will increase? And if it costs a house buyer just 3,000 francs more in mortgage interest per year, if he pays 300,000 francs more than planned for his dream house, then an upward price spiral is almost a logical consequence.
Home market comparatively crisis-resistant
At Finma, too, it is not part of the job profile to worry about the social impact of high real estate prices. Their job is to oversee the banks and ensure the functioning of the financial markets. However, this does not rule out the possibility that the authority will be a little more open to ideas from banks on how younger and less wealthy households could also be able to buy their own home.
When the Raiffeisen Group made a move a good five years ago to make the affordability regulation “flexible” so that people without a significantly above-average wage could also afford to own their own home, Finma expressed great skepticism. This ultimately led to Raiffeisen burying the project again and since then no other bank has dared to make any suggestions. The principle of affordability would not have been undermined at all: through targeted debt reduction over the term of their fixed-rate mortgage, customers would have grown into affordability.
A little more openness would also be appropriate because the home market in Switzerland has never triggered a crash. Speculation about building land and apartment buildings was responsible for the real estate crisis of the 1990s. That’s where the big price slumps took place. The main problem faced by homeowners at the time was that there were practically only variable mortgages and they were therefore not protected from rising interest rates. This is different today: Most mortgages are taken out at a fixed interest rate, if necessary for ten years or more.
The Federal Council and Parliament are required
Politicians in particular, i.e. the Federal Council and Parliament, should not be indifferent when fewer and fewer households have access to their own homes. Not least because there is a constitutional mandate that “Purchase of apartment and house property that serves the personal needs of private individuals”, to promote. It is questionable whether this task is currently being fulfilled, because the home ownership rate has not increased since 2016, but has actually tended to decrease, although, unlike in the past, it is cheaper to live in your own home than to rent. First-time buyers seem to be getting less and less of a chance when it comes to home sales. To this end, existing homeowners are buying up more apartments in order to rent them out, thereby converting their own homes into rental apartments.
The issue is already on the political agenda. The Uri Central Councilor Heidi Z’graggen has one in mid-December parliamentary motion submitted, which calls on the Federal Council to take measures to promote the acquisition of owner-occupied property. What will become of it is of course still open. An initial response from the Federal Council is expected by the end of February.
Personal preferences instead of market timing
Irrespective of this, all those who want to buy their own home, even though they are neither top earners nor have inherited a fortune, should not give up hope. Even when it comes to mortgage lending, theory and practice do not always match. Even those who do not quite meet the banks’ official affordability criteria have a chance of getting a loan.
On the one hand, there are more and more mortgage providers outside the banking sector who are not subject to such strict rules (e.g. pension funds). On the other hand, the banks themselves are allowed to make exceptions to a certain extent. They prefer to do this with customers who either already have a mortgage or who, thanks to their assets, could be attractive for additional business. But it’s definitely worth insisting on.
Everyone has to decide for themselves whether the time is right for a purchase or not. Because the answer should depend less on the market and more on your own life planning. How the prices will continue cannot be predicted. Even the National Bank, which has been advocating caution for years, always emphasizes in its warnings that it does not know whether the big crash is imminent or not. In its recent speech On the real estate market, SNB Vice President Fritz Zurbrügg spoke of an “increased susceptibility to corrections in the form of falling prices” and a “probable continuation of the current upward phase in the mortgage and real estate markets”. As a buyer, you can hope that prices will not fall. You shouldn’t expect that, especially now that interest rates could rise again soon.