Inflation is on the rise

For a long time, there has been talk in the USA and the euro zone of temporary inflation as a result of high fuel prices. But now it has arrived and is making enormous waves at 6 to 8 percent per year. The central banks, whose most important goal is price stability and thus fighting inflation, have reacted accordingly: The biggest interest rate hike in 22 years was decided, and further interest rate steps will follow.

In the USA, where there are currently theoretically two vacancies for every unemployed person, wages will therefore rise sharply in combination with the interest rate hike. In addition to this dried-up labor market, there is a lack of raw materials and the high energy prices are not just temporary.

All in all, the global outlook is not rosy. But what does all this mean for Switzerland

Construction material cost inflation is estimated at 8 to 10 percent. Labor costs have not increased at the moment, although these types of work are all well utilized. Thus, the price of labor will also be higher in our country in the foreseeable future, and fuel prices remain high. Accordingly, SECO has now raised its inflation forecast for 2022 to 1.9%.

The Swiss National Bank is still adopting a wait-and-see stance, not yet following the significantly higher interest rates abroad, as this would lead to a weakening of the Swiss franc. However, it would be wrong to naively believe here that this cannot change if inflation also increases more significantly both here and abroad. Then the SNB will do the same as the Federal Reserve and pursue its main objective by subordinating everything else to price stability.

Interest rates will rise when inflation is present

The NZZ recently did an excellent job of summarizing current developments in a comprehensive article, which also hid a warning to investors: "Don't fight the fed."

So the Swiss National Bank will also raise interest rates when inflation needs to be fought, even if we all cannot afford high interest rates. After all, the world and especially its economies are already heavily indebted. But since these nominal amounts do not increase due to inflation, inflation naturally helps repay the debt. So in this situation, an interest rate hike or upstream inflation also has its good side.

As a consequence, this naturally also applies to real estate, 50 to 60 percent of which is mortgaged in Switzerland.

Rising interest rates will also increase capitalization rates for investment properties, although commercial properties with leases that are usually fully inflation-linked will be less affected than residential properties. Thus, for the latter, yields are rising rapidly and if there is no recession with less demand for rental space, these assets will remain attractive despite rising interest rates. The situation is somewhat different for residential investment properties, as inflation can usually only be passed on at 40 percent and, due to the reference interest rate lagging behind developments, only with a delay of three to four years.

For many owners, there is one bright spot: 90% of real estate owners have fixed mortgages for five to ten years and they are all not directly affected by interest rate increases. However, the issue remains critical, as the holding costs of a property do threaten to become significantly higher in the long term.

Overall, however, it can be said that there is no need to worry too much on the interest rate front at present. Inflation seems to be under control and Switzerland would also benefit from a weakening of the franc. After all, this is a good opportunity to reduce our immensely high foreign currency reserves. Without a mandate, the SNB has in fact built up a "sovereign wealth fund" with 1,100 billion Swiss francs in foreign currencies - a foreign currency mountain as high as the entire mortgage market of the whole of Switzerland.

Accordingly, the jump in the last two months will not continue to the same extent. Above all, this is also due to the fact that key interest rates in Switzerland have not yet been adjusted.

In the long term, however, it is certainly true for everyone to once again pay more attention to financing strategy than was the case in the low interest rate environment of recent years, which lasted for years.

The stock market is on the move

Currently, the stock market is turbulent and certain segments such as technology stocks in the USA are showing strong downward tendencies. What is astonishing is how good their corporate financial statements are and how money is still being made. Thus, it is not possible to speak of a fundamentally negative mood on the stock market.

What is clear, however, is that strong distortions on the stock market have a direct impact on the real estate market, as buyers of real estate often hold their equity directly or indirectly in shares, not least because of negative interest rates. If the value of money invested on the stock market falls, less money is available to buy property.

"The four most important factors in determining trends in the real estate market are inflation, interest rates, stock market activity and the supply-and-demand situation."

The supply-and-demand situation

The population increase in Switzerland and worldwide is continuing. It cannot be explained away as a constant with exponential development. Currently, we are experiencing an additional increase in demand for housing due to a surge in refugees from Ukraine.

On the other hand, the creation of new housing is running much too slowly for many reasons. Construction costs will rise due to higher energy costs and soon also higher wages, there is a lack of raw materials, semi-finished products and technical components. Or these will be significantly delayed - anyone ordering a heat pump today can expect delivery times of up to a year. Then, especially in metropolitan areas, new obstacles come up for those willing to build; we reported on this here. In the canton of Zurich in particular, value-added compensation will not lead to increased construction activity either, we also reported on this in a comprehensive article. Thus, densification is not progressing at the necessary gallop, and in rural regions a counter-trend is already discernible: local initiatives for decongestion with lower utilization rates and greater spacing will increase, because housing has become even more important since Corona. People want it spacious and with a nice distance to the neighbors. Finally, foreign buyers are today effectively prevented from buying a property by approval periods of often up to nine months for a Lex Koller certificate.

Renting is currently an attractive option, but here, too, there is a lack of sufficiently sought-after properties.

Accordingly, we expect a moderate flattening of demand in our regions due to the current situation with inflation coming into gear and interest rates rising. However, we judge this to be regulation and far from a collapse. After all, if we only have 300 instead of 500 dossier inquiries for a detached house in or around Zurich, it can be clearly said that demand is still high. And as long as the creation of new housing lags behind population and income trends, we do not expect a total reversal of the trend. This also applies to the price trend, as there has never been as much inherited money or advance inheritances available for the purchase of housing as there is today.

So the dream of home ownership will remain and the number of people who can continue to afford it will not decrease significantly either. However, we do not rule out the possibility of price adjustments in the long term. Nor do we rule out that this will open up a gap that can only be solved by making it easier to build attractive rental properties. This is an urgent social issue that calls for politicians and every individual to use their influence.