When 10-year mortgage interest rates fall to 1%, home ownership becomes a very attractive alternative to renting. A recent report on home ownership shows why home ownership remains out of reach of the average Swiss household despite very low interest rates.
The report, by Credit Suisse, says that despite the strong desire for people to own their own home, fewer and fewer households are able to afford them as the years go by.
The reason is twofold. Prices are high and Switzerland has regulations that restrict mortgage lending.
To qualify for a mortgage in Switzerland, the golden rule of financing must be met. First, a minimum of 20% of the purchase price must be put down by the buyer. Then a further sum to cover transaction costs, which include taxes and notary fees, must be added on top. Finally, an imputed affordability criteria must be met. Interest on the loan at an assumed rate of 5%, plus 1% of the home’s value in assumed maintenance costs, along with principle repayments equivalent to one third of the loan value over 15 years, must not exceed one third of the borrower’s gross income.
Pension funds can sometimes be used to fund part of the down payment if it is for the purchase of your main home.
The other challenge for home buyers is valuation. If the transaction price is above the market value, then the bank must use the market value to calculate loan eligibility. This means a deposit of more than 20% of the price is sometimes required.
Lending guidelines are set by FINMA, Switzerland’s financial regulator.
For example, a household with an annual income of CHF 100,000, a deposit of CHF 120,000 and enough extra cash to cover the transaction costs, would not qualify for a mortgage to buy a home for CHF 600,000 under the current rules.
According to Credit Suisse, when these imputed affordability criteria are applied to an average Swiss household income, and the financing requirements for an average new home, the result is 39% of income, well above the 33% maximum. The last time this percentage was below the 33% threshold was in 2011. This means an average household cannot afford to buy an average new home.
The report says that the high prices around Lakes Geneva, Zurich and Zug have prompted households to switch to the surrounding regions. This has resulted in accelerated price growth in these regions. An average household is now largely no longer able to afford new properties in these surrounding regions. Average new homes in 68 out of Switzerland’s 106 regions are out of reach of an average Swiss household.
The bank Raiffeisen has been calling to have Switzerland’s mortgage lending restrictions loosened, however in February 2017 it dropped its plans after FINMA voiced its opposition.
Loosening home lending rules would make it easier for many households to buy property. It would also push house prices higher. And this is FINMA’s concern. FINMA tightened Swiss Bankers Association mortgage financing guidelines in 2014.