I think you analysed it very nicely. I see similar in Geneva where anything up to ~2.5M is selling like hot cakes, absolutely bonkers
It starts to smell to me like when taxi drivers give out share tips: I am repeatedly told by people in my extended circle and who are going through the purchase process that prices are eye wateringly high but it is still cheaper to buy than to rent due to the low interest rates.
If interest rates do go up the potential downside is huge. By my maths the cost to own a house bought for 2.5m with 80% loan and 1% fixed interest is ~5000 CHF / month, including tax on deemed rent but excluding opportunity cost (since most folks do not think about that).
It would cost 5-5.5k per month to rent a similar property.
If interest rates are 3% in 15 years’ time, anyone buying the house for 2.5M would have a cost to own of 7-8k CHF / month. To get back to 5000 CHF / month would require the price of the house to come down by ~1M CHF
One consideration is that many assume to pay only 35% of the property within first 15 years so monthly payment is lower than 5k. But you just postpone the problem.
I think you right and prices are too high in a nice location. However nice location e.g lake view around a key city is naturally a limited supply so they will retain some value.
Future interest rates are unknown. I would believe interest rates will never go up too much as central banks will try to control these plus the world nowadays is more transparent and interconnected than in the past, I think it’s going to be difficult to see interest rates in US/EU above 5%. But history always repeats itself. I am too young to believe I have seen everything. If we have some mustachians here in the age bracket 60 or plus, they can tell how many different rates they saw in their lifetime.
Locking 1% or sub 1% for 10 years is a great piece of mind. I bought a property abroad at 2.84% and remortgaged at 2.09% a couple years ago for 5 years. Rate is high but piece of mind as well.
I didn’t count amortisation - only interest, 1% maintenance, tax on deemed rent
Indeed the unknown is what happens to consumer price inflation and interest rates. I can envisage inflation coming in USA and other countries, they have so much debt it seems almost impossible to pay it down otherwise so it makes sense they let inflation run hot
I am not sure it follows that inflation will arrive here.
But you know why, right? No regulations, so you could buy and sell a house on the same day.
True story, a house had 3 different owners the same day…how can you expect something different than a crash?
I think SNB has been smart putting restrictions on lending to avoid / delay a crash until now but I don’t think we can conclude these will stop a crash ever happening again. Plus we have negative short term interest rates which was not the case in the 90s
To be honest I’m a bit scared to be leveraged in a house…but the graph of S&P of the past 10 years doesn’t look healthy, and I have always the question, where people with Billions/Trillions are moving the money when everything is dark red? (Farms and water?)
Diversified portfolio with cash buffer to benefit from market downturn. Look at universities endowment fund like Yale. Rich people are putting more money in private equity. Private markets are less impacted by valuation swings than stock markets, it does not mean that value goes does not down but people weather storm before cashing out
Yale targets a minimum allocation of 30% of the endowment to market-insensitive assets (cash, bonds, and absolute return). The university further seeks to limit illiquid assets (venture capital, leveraged buyouts, real estate and natural resources) to 50% of the portfolio
Vs other endowment, Yale has higher allocation than private markets. None knows whether this is the right way to go but still many start to move towards that direction
calculation fully inline with what we’ve seen from friends buying a 1.8 M CHF house. Costs theoretically around 2500 CHF/month (mortgage, Eigenmietwert, charges, after tax). But on top of it they need to amortize 200K within the next 10 years and already invested more than 30K for small renovations which are mostly maintaining the value of this house from the 1920’s. The house is nice and livable as it is, nevertheless they will need to invest 200-300K more in the next 10 years to refurbish it to a modern standard.
The real estate market would need to drastically increase at the time they will sell to cover all these costs, otherwise it is financially better to rent.
That depends on the market. When we bought, about 8 years ago, we also thought we’d need to save 200k to bring down the mortgage. However, instead with price increases we could actually currently take more out. (I am, however, a bit reluctant to borrow extra money to invest that in the stock market – seems too much leveraging for me).
Indeed it depends. In this case the high amortization level is due to the fact that the property purchase price is higher than the bank estimate. And despite high salaries, they withdraw part of their second pilar and probably pledged the third pilars
@wavemotion, if you bought an expensive property recently. can you help the community by sharing some info on your gross income, calculations that you consider before buying the property and motivation to buy vs rent?
that can be expensive to maintain. A brand new house “should” not have issues for many years.
I’m not sure if it’s a good idea
Hey, if you search in this thread you will see most of the numbers and the reasons.
I think there is a nice brainstorming (of opposite views) with Bojack
From 1969 to 1989, Dividends were on average 4.1%.
Sure a 3.168% real annualized return isn’t the best, but it is far from bad.
Even from the top in 1929 you would have positive real return after 20 years.
Here is an update on the Swiss real estate market from Raiffeisen that I found interesting (Fr/De/It). My take aways:
Prices are going up. Even though prices are dizzying, “everybody who can buy is doing so since owning is less expensive than renting due to the low interest rates”
Rents are going down, since due to the low interest rates on bonds it is logical for investors to buy and build more rental properties
Monetary policy is determining property prices. They do not expect interest rates to go up in the short term
What could possibly go wrong?
The study includes an analysis why property is not a hedge against consumer price inflation in the short term. It only works in the long term - which they quote is 10 years but do not elaborate why, example from the 90s shared by xorfish above suggests it can be longer.
I would not consider Raiffeisen’s opinion to be neutral. If more people buy they make more money. If there is a price decline their risk is relatively low since buyers are stress tested and must amortise to 65% debt within 15 years.
Hypothetically, if someone took a 10y mortgage with a fixed rate, what would have to happen within that period for him to be worse off than if he was renting? I guess the loss of value would have to be pretty significant, triggering margin calls or being forced to sell at a loss at the end of the lending period.
Against this backdrop, the SNB currently considers the vulnerabilities on the mortgage and real estate markets to be high. According to its assessments, markets today are more vulnerable to the risks of declining prices and increasing loan defaults. Thanks to substantial capital buffers, however, most banks should be capable of absorbing any associated losses.
So at least while they think it’s overvalued, they don’t think it’s a systemic risk, good news for people not invested in RE
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but I don’t live in Zurich or similar.
easier and cheaper.
