Data from the Raiffeisen Group show that around a quarter of all inheritances flow to the younger generation in the form of advance inheritance payments. These play an increasingly important role when buying real estate.
The dream of a family home lives on: aerial view of a residential area in the canton of Vaud.
Younger buyers in Switzerland can hardly realize their dream of owning their own property on their own. According to the new real estate study by the Raiffeisen Group, in 2021 prices for single-family homes rose by 10.3 percent and those for condominiums by 7.2 percent. According to the bank, this is the largest annual increase since the in-house transaction index was introduced. The increases in value may be gratifying for existing owners. For new buyers, they mean equity requirements and affordability requirements that are even more difficult to meet.
Trend towards inheritance advances
While in 2000 a typical condominium with 100 square meters and four rooms cost 450,000 francs, today it costs 910,000 francs. Ergo, instead of the 90,000 francs at the time, the buyers have to contribute around twice as much in the form of equity, at 180,000 francs.
In order to meet the affordability requirements prescribed in addition to the minimum equity, buyers must also show a household income of 160,000 francs, for a single-family home even well over 200,000 francs. “For most Swiss households, it is no longer possible to overcome the equity and affordability requirements for the purchase of a suitable property on their own,” writes the bank.
The fact that, despite everything, there are still buyers who are able to pay and who are driving prices up in the real estate market is due to the trend towards inheritance advances. In this regard, Raiffeisen speaks of an “inheritance-price spiral” (based on the wage-price spiral).
The baby boomers who have already retired or are about to do so have experienced economically prosperous years and have thus been able to build up substantial assets. “On average, they have fewer descendants than previous generations and can therefore inherit more on average or transfer them in the form of inheritance advances,” explains Raiffeisen chief economist Martin Neff.
Neff explains it using his own family as an example: He has three siblings who shared a rather small inheritance. Today, on the other hand, due to the lower birth rate, there are more sole heirs who can appear on the real estate market with inherited or withdrawn assets with higher purchasing power.
Data from Raiffeisen show that around a quarter of all inheritances flow to the younger generation in the form of advance inheritance payments. The average early withdrawal is CHF 77,000. On average, it is 8 percent of the purchase price of a property or around 42 percent of the minimum equity required to buy a typical condominium.
The many early inheritance withdrawals mean that homebuyers on the open market tend to be young, with a median age (half are younger, half older) of 43 years. At 39 years, it is lower for single-family houses than for condominiums, at 48 years. Almost a third of the single-family home purchases financed by Raiffeisen are made by mortgage holders under the age of 35.
The trend towards home purchases financed by inheritance is likely to continue, which is also reflected in the growing amount of inheritance and gifts. According to a study by the Lausanne economics professor Marius Brülhart, this should have reached 95 billion francs in Switzerland in 2020, whereas in 1999 it was less than half at 36 billion francs.
Greater competition in the mortgage market
As buyers compete for the dwindling supply of real estate, banks are grappling with new competition in the mortgage market. Although they still have 94 percent of all outstanding mortgages on their balance sheets, pension funds in particular are catching up. With a small market share of two percent, they managed to claim an impressive ten percent of the mortgage volume growth for themselves in 2020. “In this way, the pension funds are rapidly expanding their market share,” says Raiffeisen.
Chief economist Neff says that pension funds are definitely “no longer a negligible player”. They benefit from less stringent regulatory requirements and have their own customers as PK-insured “practically on the doorstep”. In principle, every employee can ask their pension fund for a mortgage. “The answer is more often positive than before.” Provided that the necessary small change for equity and mortgage interest – if necessary from the parents – is available.