Is Swiss real estate expensive or cheap?

[Bojack]

I would like to hear your opinions in the topic of real estate. It has been brought up before, but this time I’d like to back it up with data and some nice charts.

To put things in context, currently I’m 90% invested in VT and 10% in CHF. Might switch to VTI+VXUS, as suggested by @hedgehog, but the basic principle is the same.

If all goes well, I should reach financial independence in 6-8 years, before I hit 40. When the time comes, that I decide to, at least temporarily, stop working, I would like to have something more tangible than just an ETF. Thus I’m considering to invest a portion (maybe 20-30%) into real estate. Whether it will be in Switzerland, Poland or somewhere else, I don’t know.

I’d like to focus on the Swiss market, because my girlfriend’s parents would like to contribute to buying her a flat. The current prices make them suggest really remote locations, where a young active person would not really like to live. So I’m interested as to how the situation might develop in the future.

Here are some charts as food for thought.

UBS Bubble Index. According to it, we’re in a risk territory, so it’s not the best time to buy. But the changes go really slowly, so we could wait another 5-10 years until it’s OK to buy.

Price to rent ratio. UBS: Home prices are high, relative to rent. The long-time average ratio is 25, so a rental yield of 4%.

However, according to the Economist, it’s barely overvalued.

And if you look at price to income ratio, then it suggest that homes are undervalued! I wonder what is the reason for this discrepancy.

Finally, real home prices (inflation adjusted). It looks like home prices got much more expensive compared to other goods since 2000 and they are at their previous peak of 1990.

Sources:

• UBS Swiss Real Estate Bubble Index: Q4 2017
• The Economist house-price indices

[wapiti]

The real estate pricing in CH depends a lot of the regions (main reasons of the discrepancies of the graphs). The publications of UBS and CS
https://www.credit-suisse.com/media/assets/private-banking/docs/ch/unternehmen/unternehmen-unternehmer/publikationen/schweizer-immobilienmarkt-en.pdf and
Swiss real estate market: Real Estate Bubble Index | UBS Switzerland
provide detailed info on this topic.

My thoughts on the downsides of owning a house/apartment:

• Lack of flexibility: what happened if you need to have a bigger apartment because of kids, if you find a really good job elsewhere, when you get older you would like to move elsewhere, issues with your neighbours ect

• Taxes: When you have fully reimbursed your mortgage, you need to pay the income tax on the income the house/apartment would generate if rented. If you sell the house, you have a tax on capital gains. ( I think stocks ETFs are a lot more tax efficient and easier to manage when you move to another country).

• High cost of buying/selling: notary etc.

• Not diversify

• In some regions, it costs more to own an apartment/house than to rent it.

• ROI, the ROI of stock ETFs is higher than real estate in the long term. However, with the low rate for mortgage, this is not maybe true for Switzerland

@Bojack

If all goes well, I should reach financial independence in 6-8 years, before I hit 40. When the time comes, that I decide to, at least temporarily, stop working, I would like to have something more tangible than just an ETF. Thus I’m considering to invest a portion (maybe 20-30%) into real estate. Whether it will be in Switzerland, Poland or somewhere else, I don’t know.

I understand your point, but I think it’s a little irrational. It’s a like saying I prefer to invest in Gold, because I can touch it

@Bojack

I’d like to focus on the Swiss market, because my girlfriend’s parents would like to contribute to buying her a flat. The current prices make them suggest really remote locations, where a young active person would not really like to live. So I’m interested as to how the situation might develop in the future.

I think the main questions to ask are: What is the goal to buy a flat ? Does it economically make sense on the long-term?

[Bojack]

@wapiti

ROI, the ROI of stock ETFs is higher than real estate in the long term. However, with the low rate for mortgage, this is not maybe true for Switzerland

If you leverage a real estate purchase with a mortgage, you can compete against the stock market, but you also multiply the risk. So it might end up being riskier than stocks.

@wapiti

I understand your point, but I think it’s a little irrational. It’s a like saying I prefer to invest in Gold, because I can touch it

There are some serious experts who hold gold in high regard, like Alan Greenspan. If something bad happened to your ETF’s (digital theft, glitch, etc), at least you would have this flat where you could live. For some reason when they publish the wealth declaration of politicians, most of them have sth like a house, 2 flats to rent, some cash. Maybe this is totally unreasonable.

@wapiti

I think the main questions to ask are: What is the goal to buy a flat ? Does it economically make sense on the long-term?

It provides a steady income if you rent it out, and lowers the cost of living if you live there. If your stocks take a plunge and you need to shift your spending to “economy mode”, the rent can make up half of your costs.

Don’t get me wrong, I mostly agree with your points. That’s why I never bought a flat myself. I just like to make a reality check sometimes.

One more chart I would like to share is the real price comparison between countries. For some reason, the English speaking countries: UK, Ireland, Canada, Australia, NZ have mostly seen increases in real estate prices. From 1970 they increased 4 times, thats 3% of average annual real price gain since 50 years! Could someone explain this? On the other hand, in Countries like Germany, Japan, Switzerland and Italy, the prices are not much higher than 50 years ago, but at least not lower.

[wapiti]

@Bojack

For some reason, the English speaking countries: UK, Ireland, Canada, Australia, NZ have mostly seen increases in real estate prices. From 1970 they increased 4 times, thats 3% of average annual real price gain since 50 years! Could someone explain this?

Some good articles I have found:

Why German House Prices have been Flat | The Morgan Foundation

Most Germans don’t buy their homes, they rent. Here’s why

In World's Best-Run Economy, House Prices Keep Falling -- Because That's What...

[Julianek]

I guess the first question that needs to be answered, because it is quite unclear from bojack’s posts is if this is for investing through rental, or just to live in it.
At first I thought it was for investing (i.e to diversify from his ETFs), but then he says he does not want to live in a remote area (so I guess it is to live in the said real estate).
The distinction matters a lot!

If it is solely for investing purpose, then I would say that the Swiss market is very expensive, though i do not doubt that some smart investors will find a good opportunity.

I’ll talk about Zurich because I only know this area, but to give some ideas, I rent my apartment for 18kCHF per year. Buying a similar apartment in the district would cost between 800’000 and 900’000 CHF! That is a ridiculously low brut yield between 2 and 2.25% per year. Once you include maintenance, taxation and other not so nice stuffs I would be surprised if there is something substantial left.

I’ve seen the argument about leverage with a mortgage. Take into account that rates are historically low. If they were to go up :

• your mortgage would be much higher, eating a lot of your rent
• less people would be able to buy a similar house, so demand would be lower -> housing price would go lower.So take care of not going into negative equity.

If the purpose is to live there, what can I say except that :

• It is a highly illiquid asset that will or will not appreciate in time (demand and supply, centralization vs decentralization, current rates and so on… the fact is we do not know at all). Plus the fees and the maintenance are usually quite high.
• I would not put more than 20% of my net worth in my house. The goal of a house is to provide a shelter, but outside this it does not produces cash flows, so except the shelter function and the warm feeling inside it is not that useful (but usefulness and revenue is in the eye of the beholder : for instance, if you decide to transform your house in Bed and breakfast, then it starts generating revenues…)

[Bojack]

@Julianek

I guess the first question that needs to be answered, because it is quite unclear from bojack’s posts is if this is for investing through rental, or just to live in it

Well it is also unclear to me. Even if I buy a flat for myself, I can always move out and start renting it, so I guess the distinction doesn’t matter so much. For the time being I would like to advise my girlfriend well, and she would of course be buying the flat to live in it. Maybe then, eventually, after a few years, if we decided that we have had enough of work, she would rent out this flat. The thing is, I guess her parents keep the money on the bank account, so I guess a flat would be a step up anyway.

@Julianek

I’ll talk about Zurich because I only know this area, but to give some ideas, I rent my apartment for 18kCHF per year. Buying a similar apartment in the district would cost between 800’000 and 900’000 CHF! That is a ridiculously low brut yield between 2 and 2.25% per year.

1500 per month? That is a low rent, with or without Nebenkosten? I live in a modern flat, 99 sq. m, around 10-15 min with the train from HB and pay 2000 + 300 Nebenkosten. I assume the value of the flat to be around 900’000 too.

@Julianek you wrote on this forum a few times, that you plan to move to Poland in the future. Do you also plan to rent there? Do you always plan to keep most of your wealth in digital form? (ETF, bank account). No worries there?

[ChickenFat]

I would guess @julianek lives in a 2- or 2,5- Zimmer Wohnung, while @Bojack gets around 3 or 3,5 Zimmer . Just a rough guess.

[Bojack]

Yes, it’s 3.5.

Btw I wonder how these developer/landlord companies work and what are their real profits. OK, let’s say that they get 2.5%. But do they use leverage/mortgage? When they build a whole settlement of 100 flats, each worth 1 million, it’s in theory worth 100 million, but of course the total build cost is much lower.

[Julianek]

And correct as well, 2.5 rooms, 65 square meters for 1500 CHF including Nebenkosten. Living in Leimbach district, with a train to Hauptbahnhof in 12 minutes. Renovated 3 years ago, so considered like new.

@Bojack

@Julianek you wrote on this forum a few times, that you plan to move to Poland in the future. Do you also plan to rent there? Do you always plan to keep most of your wealth in digital form? (ETF, bank account). No worries there?

Correct, I plan to go in Poland. I guess the decision for owning or renting will depend on Poland’s situation in 8/10 years. However, if I buy, I would stick to my above rule, which is to not put more than 20% of my net worth in my house. I have to admit, given current prices it is much more doable in Poland than in Switzerland

[hedgehog]

@Julianek

And correct as well, 2.5 rooms, 65 square meters for 1500 CHF including Nebenkosten. Living in Leimbach district, with a train to Hauptbahnhof in 12 minutes.

Leimbach is considered a cheap and not very desirable quartier, there’s no way someone will pay 800-900k for your apartment even if new, I would guess 600-650k tops

I haven’t been following the market much, but I’m under the impression about 4% brutto yield is the norm these days. Of course, you can see ads advertising yields as low as 2-3%, but that doesn’t mean people are investing at these prices. Price you’ll pay for a condominium in general will also be in general higher than what investors buying them in a bulk as a whole house would pay

@Julianek

I would not put more than 20% of my net worth in my house. The goal of a house is to provide a shelter, but outside this it does not produces cash flows

Sure it does - the savings you get from not having to pay rent to somebody else. Tax advantages when repaying the mortgage via pillar 2/3 is another

[hedgehog]

@wapiti

Lack of flexibility

+1, this is not to be underestimated, real estate can be very, very illiquid. Unless you want to give someone a present in the form of a good discount from market price

@wapiti

If you sell the house, you have a tax on capital gains.

Also potentially you may be liable for capital gains in your new country like US. It’ll take a while to sell the house and if you’ll be a US resident when the sale goes through, you can be hit with a nasty surprise from the IRS.

[Julianek]

@hedgehog

Leimbach is considered a cheap and not very desirable quartier, there’s no way someone will pay 800-900k for your apartment even if new, I would guess 600-650k tops

I am not making that up though. There are not many ads on the market, but for instance the only 2.5 rooms in Leimbach selling on Homegate is at 920k CHF

Available here https://www.homegate.ch/kaufen/107762357?5
Note that I am not saying that this will be the price at which the apartment will be sold. But that was my first point of reference about the neighborhood. Anyway, I am not planning to buy in Zurich so I did not dig much more.

@hedgehog

Sure it does - the savings you get from not having to pay rent to somebody else. Tax advantages when repaying the mortgage via pillar 2/3 is another

But it does not come for free : the price of the house, plus a good fraction of the price in mortgage interest, plus property taxes.
Apologies if I was unclear : what I meant is that a house solves only the economical problems related to our need for a shelter. Renting it or owning it depends on the local conditions, but still, it would be unwise to count on your house to generate the cash flows needed to finance the rest of your lifestyle.

[hedgehog]

@Julianek

I am not making that up though. There are not many ads on the market, but for instance the only 2.5 rooms in Leimbach selling on Homegate is at 920k CHF

I think you forgot to sort by price

And floor area is a much more important price factor than number of rooms.

If there’s not many ads right now to make observations from (it costs money to keep an ad running), just subscribe to new ads matching a search, you can do that easily on homegate

@Julianek

But it does not come for free : the price of the house, plus a good fraction of the price in mortgage interest, plus property taxes.

So what? Nothing in life is free. Dividends on your stocks aren’t free either, they require some cash expenditure to buy the stocks first for example

Netto you should still be in the plus, or it definitely doesn’t make sense to buy if you can rent much cheaper at owner’s expense

[Bojack]

@hedgehog

I haven’t been following the market much, but I’m under the impression about 4% brutto yield is the norm these days.

Well, the the UBS price to rent ratio of 29.5 would correspond to a yield of 3.4% for the whole Switzerland. Numbeo.com provides 3.3% for Zurich outside city center. If my flat was worth 800’000, it would set the ratio at 3%.

@hedgehog

Leimbach is considered a cheap and not very desirable quartier, there’s no way someone will pay 800-900k for your apartment even if new, I would guess 600-650k tops

What I like to do is to compare rent and ownership prices of “Neubau” projects. The advantage is that they have to sell/rent a lot of flats in a short time, they are located in the same place, built at the same time, so they are a good ground for comparison.

So in Leimbach I don’t know anything, but in Manegg there is Green City, a really big project.

For ownership flats, there is the Tuchmacherhof, all the flats already sold, but you can use the wayback machine to find the prices:

Tuchmacherhof - Wohneigentum mit Zukunft

For rent flats there is the Green Life:

greenlife-zuerich.ch

So a 115m 4.5 room 4OG flat costs 2600+300 to rent and 1’030’000 to buy. That’s 3% annual yield.

94m 3.5 room 2400+270 to rent and 920’000 to buy. 3.1%.

These are the numbers I’ve seen and 4% would seem to me like an expensive rent or overly cheap flat.

[hedgehog]

Well if you want a data point, we bought a place about a year ago at 3.9% yield: about 1850 CHF net rent without NK for 570k in Adliswil, 70m^2 + garage, mid 1990s build. Yield was borderline acceptable, there were better offers on the market in more remote areas, we chose it ultimately because it was very close to us, less hassle managing it, plus there’s maybe some potential to raise it, good location. Then the price in absolute terms is moderate, should be more liquid to sell than 1M+ flats.

Spinnerei Areal project in Wollishofen last year were selling lofts, cheapest ones were 590k for 72m^2, brand new except the outer walls for historical reasons, comparable deal, but we didn’t want a loft.

For even more data I’d suggest to dig into yearly reports of public RE funds, lots of hard facts in there: http://immofunds.ch/site/de/analyses/funds/. Even looking at dividend yield + TER alone is quite revealing.

[Bojack]

Oh so you do hold real estate? I don’t think I saw you take a stand on real estate on this forum. What convinced you to buy? What’s your take on this topic?

A 70m flat from 1990s in Adliswil going for 1850 net rent seems a bit much to me.

I’ve been thinking about it today and maybe the higher the price, the lower the yield. So 4% yields could be achievable for some property valued 600’000. But if you would look for a big (>100m) modern flat in Zurich or at Zurisee, you’re looking at spending 1.2-1.5 million, but you could rent it for 3% of that price.

[hedgehog]

@Bojack

Oh so you do hold real estate? I don’t think I saw you take a stand on real estate on this forum. What convinced you to buy?

Diversification and cheap mortgage money: effectively after taxes we’re paying just 0.6% for the money

@Bojack

I’ve been thinking about it today and maybe the higher the price, the lower the yield

Well, by definition…

But if you would look for a big (>100m) modern flat in Zurich or at Zurisee, you’re looking at spending 1.2-1.5 million, but you could rent it for 3% of that price.

I’d not recommend buying a big apartment, they’re very, very illiquid. Hard to sell, hard to rent out, rent/m^2 is lower with size. Average size of modern families are dropping, better to invest same money in a house full of small apartments, there’s more demand, less financial risk due to problems with a particular tenant too

[Bojack]

@hedgehog

By definition…

No, that’s not what I meant. I mean that flats in the lower segment and outside city center can generate a higher yield than top level apartments. Just a theory, anyway.

[Krunch]

@Bojack

I mean that flats in the lower segment and outside city center can generate a higher yield than top level apartments. Just a theory, anyway.

Seems to line up with The Real Estate Investing Rule To Follow: Rent Luxury, Buy Utility
Yes, the US is probably different in many ways but the reasoning in this case appears to be similar.

[Bojack]

Thanks @Krunch, it’s nice to see your hunch confirmed by a blog post . Buy Utility, Rent Luxury, so simple. Just to confirm, @hedgehog: do you live in your Adliswil flat, or rent it out?

Btw the guy from the article must have some sweet daily rates as a banking consultant in order to consider spending $20’000 on rent once he retires. And now he lives in a house that would rent for $8,500. Didn’t know people as rich as him bother to run blogs.