PwC Immospektive May 2023

Inflation in Switzerland falls in April to its lowest level in a year

Despite the ongoing energy crisis resulting from the war in Ukraine and the still difficult economic situation in the global financial market, the Swiss economy has thus far held up well. There was nonetheless a high level of inflationary pressure at the beginning of the year, which led the Swiss National Bank to raise its policy rate by 50 basis points in March to its current level of 1.5%. The merger of Switzerland’s two biggest banks and the failure of some US regional banks also played their part in the steep rise in interest rate volatility and widening credit spreads. However, the Swiss financial market remains resilient by international standards and is currently showing a moderate inflationary trend.

After the sharp increase at the start of the year, inflation recorded an appreciable decline in April 2023 to attain its lowest level in a year. According to the Swiss Federal Statistical Office, the inflation rate fell to 2.6% in April, as against 2.9% in March and 3.4% in February. Core inflation, which provides a more accurate picture of the change in prices, remained stable at 2.2% in April¹. Assuming a constant policy rate of 1.5%, the SNB is forecasting inflation of 2.6% and 2.0% for 2023 and 2024, respectively. This means that, compared with the previous quarter, the SNB is raising its inflation expectations by 20 basis points. Nevertheless, inflation is predicted to remain within the target range of 0–2% in 2025 [11].

According to expert forecasts, GDP growth will remain at a modest level next year: An increase of just 0.7% (in real terms) is expected in 2023, while a moderate growth rate of 1.7% (in real terms) is forecast for 2024 – as already suggested in the previous quarter [8]. In the euro area, according to Swiss Life, GDP is expected to grow in real terms by 0.7% and 0.9% in 2023 and 2024 respectively, with an inflation forecast of 5.8% and then 2.5%. According to Eurostat, the annual inflation rate in the euro area is currently 7.0%². In the US, Swiss Life expects inflation-adjusted economic growth of 0.9% and 0.6% for 2023 and 2024 respectively, with inflation expected to be 4.2% and then 2.5% [73]³. The outlook for the two largest internal markets in the West and for Switzerland therefore remains at a modest level over the next two years.

Construction costs on the rise again despite the prospect of increased building activity

Since the outbreak of the coronavirus crisis construction prices in Switzerland have continued to rise, driven by turbulence on the global markets for raw materials, building materials and intermediate products. Although the last two quarters have shown declining trends, the production cost index for stone and concrete buildings has increased of late and has once again exceeded the pre-pandemic range of +/–4.0% per year. The inflation rate for multi-family units and single-family homes built in stone and concrete increased by 0.4% and 0.2% respectively compared with the previous quarter; the annual inflation rates in this segment are now 5.7% and 5.5%. In comparison, the inflation index for building and industrial construction continues to decline, with a 3.1% drop in the index from the previous quarter, which equates to an annualised change in the index of +3.5% [18]. Expert estimates regarding an easing of the pressures in all areas have not materialised⁴.

Uncertainty therefore continues to prevail in terms of planning security for developments and investments. This is also reflected in the level of construction activity, where, as in the previous quarter, modest growth of 0.7% for 2023 is still expected, followed by 1.4% and 1.0% over the next two years [16]. However, the most recent Business Tendency Surveys conducted by the KOF Swiss Economic Institute indicate that the construction sector may be on the road to recovery in 2023. While the assessments for construction firms in Switzerland were quite modest in the first half of last year, the Business Situation Indicators have been showing a largely positive trend since mid-2022⁵.

Excess demand will be accentuated in the years to come

In residential rents, there was stagnation at the national level for new-build homes compared with the previous quarter, while rents for existing homes recorded an increase of 0.5%. Overall, rents rose by a moderate 0.2% compared with the previous quarter. Year on year, rents increased by 0.3%, with both existing and new-build homes showing growth of 0.3%. The current changes in residential rents are a continuation of the trends over the last five years, without any significant national jumps in rents⁶. From a regional perspective, the indices recorded varied movements quarter on quarter. The Jura region in particular registered a significant change compared with the previous quarter at +2.2% (change compared with the previous year: –0.4%), followed by the regions of eastern Switzerland at +0.8% (+1.1%), central Switzerland at +0.6% (–0.2%), Zurich at +0.2% (+1.5%) and Basel at +0.1% (–1.7%). On the other hand, declining residential rents were observed in the Alpine region at –0.1% (+1.8%), in southern Switzerland at –0.1% (–0.8%) and in the Lake Geneva region at –0.6% (–0.9%) [25]. Experts continue to expect rents to rise progressively over the next few years⁷. The anticipated increase in residential rents is attributable to higher inflation, the increase in the reference rate for home loans and rising demand with limited supply.⁸

In Switzerland, population growth is particularly strong compared with other European countries because of high levels of immigration. According to the Swiss Federal Statistical Office, immigration between January and December 2022 totalled around 90,000 people, which equates to an increase of 26.0% compared with the same period in the previous year⁹. In March 2023 the net immigration for the permanent population increased further from 5’900 to 8’800 compared with December 2022 [13]. Above-average immigration has led to a build-up of excess demand in the rental housing market, as construction activity is not sufficient to meet the rising demand. As a study by Zürcher Kantonalbank shows, the construction of new homes is made more difficult by an increasing number of regulatory stipulations. In Switzerland, the average number of days between planning application and building permit, including delays due to objections, is 140 days – an increase of 67% compared with 2010¹⁰. In 2022 the number of building permits for homes reached a low of 38,000 units – the lowest figure in 20 years¹¹. Objections are an increasing challenge. Since 2010, one in ten construction projects in Switzerland has not gone ahead despite having planning permission, resulting in a shortage of around 4,000 homes per year in the rental housing market¹². This exacerbates the ongoing housing shortage, as is also shown by the decline in the annual vacancy rates in 2021 and 2022 to 1.54% and 1.31% respectively¹³.

Increase in office rents in Basel and Zurich

After a decline in office rents (existing rentals) in the last two quarters, there is now a positive trend to report. In the first quarter of 2023, rents increased by 0.5% compared with the previous quarter (–3.1% in the fourth quarter of 2022). Year-on-year growth is somewhat muted at +0.1% due to the weakness in the last two quarters¹⁴. As in previous quarters, there are significant regional differences in office rent trends. Compared with the previous quarter, office rents increased by 3.4% in the Basel region and by 2.0% in the Zurich region. They continued to decline in the regions of Lake Geneva (–1.3%) and central Switzerland (–0.7%). Year on year the Geneva region continues to record the highest growth rate at 5.7% and is still the only region with positive annual growth. In the other regions, office rents have declined year on year: Basel –2.2%, central Switzerland –1.1% and Zurich –0.4%. No figures were available for the Jura and Alpine regions [38]. According to experts, office and commercial building projects are becoming less attractive as investments because of the recent rises in interest rates. However, the increase in interest rates is leading to higher returns on other investments, such as bonds. Demand for additional office space is expected to remain solid as employment in Switzerland grew sharply last year¹⁵.

According to the KOF Swiss Economic Institute, its Employment Indicator, which is important for the market trend in office space, showed a slight weakening in the second quarter of 2023, yet it fell by only 13.1 points (previous quarter 14.4 points) and thus remains above the long-term average and above the level before the coronavirus crisis. Despite the decline, employment growth is expected to be above average in the current quarter and a clear majority of the firms surveyed plan to increase their workforce in the next three months¹⁶. Compared with the previous quarter, the current forecasts for the unemployment rate also show a reduction from 2.2% to 2.0% for 2023. However, the forecast for 2024 remains at 2.3% [8].

Momentum and willingness to invest decline in the home ownership market

Irrespective of any trends on the financial markets, the volume of mortgage loans in Switzerland continues to rise steadily, reaching a total volume of CHF 1,152 billion in February of this year. This is around 4.0% higher than the previous year’s figure [24]. In contrast to the volume of mortgage loans, mortgage rates continued to experience turbulence. As a result of the SNB’s policy rate jumps since 2022, the interest rate on a three-year fixed-rate mortgage rose from 1.82% in mid-2022 to 2.60% in February 2023, and stands at 2.85% as of April 2023. For five-year and ten-year fixed-rate mortgages, rates jumped from 1.99% via 2.67% to 2.89% and from 2.40% via 2.86% to 2.96% respectively [23].

Momentum and willingness to invest in the market for single-family homes have declined because of the increased financing costs. While the price index for single-family homes rose by 1.5% and then 0.9% in the last two quarters, it fell by 0.3% in the first quarter of 2023. The change compared with the previous quarter for the mid-range and premium market segments was –0.4%, whereas the low-price segment continued to show price growth of 0.4%. Year on year, a rise in the index of 4.4% was recorded for all segments, which is attributable to the increases in the previous quarters. However, momentum within the different price segments for single-family homes altered slightly compared with the previous quarter. While the premium market segment showed an annualised change of +6.2% in the previous quarter, it is currently +4.8%. The mid-range and low-price market segments both show an annual change in the price index of +4.0%. However, the mid-range segment shows a slight drop in prices compared with the previous quarter [58].

Based on the current market situation, further downward trends in owner-occupied property prices are to be expected in the coming quarters, according to experts¹⁷. A forecast from ZKB, though, shows a moderate increase in owner-occupied property prices of 1.0% on an annualised basis for 2023 and 2024. In addition, a significant increase in the duration of marketing processes can be observed. According to ZKB, the lengthening in marketing times particularly affects new-build projects, as the financing for the building work often depends on the sales rate. If not enough units are sold, the start of construction may be delayed. This puts greater pricing pressure on sellers, which may lead to price concessions – while sellers previously enjoyed a clear advantage, buyers now have more leeway to negotiate on price, according to ZKB¹⁸.

In contrast, positive price momentum continues to be observed in the market for owner-occupied apartments. Across all segments, price growth reached 0.6% in the first quarter of 2023. The development in the individual segments is as follows: the premium segment remains the top performer year on year (+7.2%), followed by the low-price (+5.8%) and mid-range (+4.1%) segments. Thus, in contrast to the previous quarter, the growth trend in the owner-occupied apartment market is picking up again. Price levels in the mid-range and low-price segments rose significantly (by 1.0% and 1.4% respectively), while the premium segment showed a moderate change of +0.1% [3, 64]. Although financing costs have risen, homeowners are still willing to invest relatively large amounts, according to IAZI. Nevertheless, the peak in the owner-occupied segment, especially in rural and peripheral regions, is expected to be reached soon. As a result, a slowing is to be expected in all areas in the coming quarters¹⁹.

¹ Bundesamt für Statistik (BfS), Landesindex der Konsumentenpreise / https://www.bfs.admin.ch/bfs/de/home/statistiken/preise.assetdetail.24765012.html

²Eurostat, Flash estimate – April 2023 / Euro area annual inflation up to 7.0 %

³Swiss Life Asset Managers, Perspektiven Konjunktur / Mai 2023

⁴Swiss Life Asset Managers, Real Estate House View / Erstes Halbjahr 2023

⁵ETH Zürich, Konjunkturanalyse: Prognose 2023 / 2024. Milder Winter dämpft Rezessionsängste

⁶FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien Schweiz (Datenstand: 31.03.2023)

⁷Swiss Life Asset Managers, Real Estate House View / Erstes Halbjahr 2023

⁸ETH Zürich, Konjunkturanalyse: Prognose 2023 / 2024. Milder Winter dämpft Rezessionsängste

⁹Bundesamt für Statistik (BfS), Jahresstatistik Zuwanderung 2022

¹⁰ZKB, Immobilien Aktuell / April 2023

¹¹Credit Suisse, Bauindex Schweiz / 1. Quartal 2023

¹²ZKB, Immobilien Aktuell / April 2023

¹³Bundesamt für Statistik (BfS), Leerwohnungen

¹⁴FPRE, Marktmieten- und Baulandindizes von Renditeimmobilien Schweiz (Datenstand: 31.03.2023)

¹⁵ETH Zürich, Konjunkturanalyse: Prognose 2023 / 2024. Milder Winter dämpft Rezessionsängste

¹⁶KOF, Beschäftigungsindikator / Medienmitteilung 03.05.2023

¹⁷IAZI CIFI / Medienmitteilung 17.04.2023: Transaktionspreise von Mehrfamilienhäusern - Die Abkühlung ist da

¹⁸ZBK / Immobilien aktuell – Drohende Wohnungsnot, Ausgabe April 2023

¹⁹IAZI CIFI / Medienmitteilung 17.04.2023: Transaktionspreise von Mehrfamilienhäusern - Die Abkühlung ist da

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PwC-Immospektive

17 May 2023

Inflation in Switzerland falls in April to its lowest level in a year

Construction costs on the rise again despite the prospect of increased building activity

Excess demand will be accentuated in the years to come

Increase in office rents in Basel and Zurich

Momentum and willingness to invest decline in the home ownership market

PwC Real Estate

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