International Articles: Housing Finance, Prices, and Tenure in Switzerland
Bourassa, Steven C., Hoesli, Martin, Scognamiglio, Donato, Journal of Real Estate Literature
In contrast to many other countries, Switzerland generally has not seen soaring house prices in the 2000s and house prices have only recently started to diminish slightly. Also, Swiss authorities do not engage in trying to increase the homeownership rate much above its current level. This paper presents the main aspects of housing policy and finance in Switzerland, which can help to explain these idiosyncrasies. House prices and rents are also analyzed. The policies that are discussed in this paper may be useful to housing policy makers in other countries.
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After years of bullish activity, many housing markets have been experiencing significant price declines in recent months (Exhibit 1). In the United States, for instance, the S&P/Case-Shiller index of 20 metropolitan areas declined by 29% between July 2006 and January 2009. Similar price drops have been recorded in countries such as the United Kingdom and Ireland. In many of these markets, house prices had risen to levels substantially higher than those warranted by market fundamentals [see Black, Fraser, and Hoesli (2006), for the U.K., and Bacon and MacCabe (2000), for Ireland]. Some of the price increases were of course related to significant changes in fundamentals such as demographics and disposable household income [see Stevenson (2008), for Ireland]; however, much of the current market behavior constitutes a return to more sustainable price levels. In addition, the current economic crisis has led to substantially lower fundamental values.
One driver of the fast rising house prices in the U.S. and many other countries until the mid-2000s was lax lending, which enabled many households to purchase a property even when they did not have sufficient equity for down payments or adequate income. In the U.S., for instance, lenders would finance a home purchase with only a 5% down payment and in some cases with less. The homeownership rate in the U.S. rose from about 64% in the mid-1990s to over 69% in the mid-2000s, but dropped to 67.4% by the second quarter of 2009 and is expected to drop further.1 Similar lending behavior occurred in the U.K. and Ireland, with very high loan-tovalue (LTV) ratios being the norm as borrowers were able to increase the value of their mortgages based on the rising value of their properties.
Switzerland is an interesting case study because it does not appear that house prices have risen there in recent years on average at a faster rate than fundamentals (Bourassa, Hoesli, Scognamiglio, and Zhang, 2009). From 2000 to the third quarter of 2008, the IAZI private real estate price index (both houses and condominiums are included in the index) rose by 32%, while the S&P/Case-Shiller U.S. house price index rose by more than 100% between 2000 and the summer of 2006.2 The housing market in Switzerland appears to have peaked in the third quarter of 2008, with a small drop in prices during the last quarter of 2008 ('2%) and only a trivial decrease during the first half of 2009. As in the U.S., there has been significant geographic variation in house price appreciation in Switzerland with Geneva, for example, appreciating at a much faster rate than the country as a whole (Exhibit 2). Singlefamily house prices rose in that canton by more than 60% between 2004 and 2008. This suggests that although the country as a whole did not experience a house price bubble, there may be price bubbles in some Swiss markets.
In general, however, the contained house price increases during the 2000s can be attributed to quite stringent lending practices by Swiss banks. A 20% down payment is required when purchasing a property. Also, the debt service (interest and amortization) cannot exceed one-third of the household's income. Another moderating factor has been the use by many lenders of hedonic mass appraisal models for valuation for underwriting purposes. As compared to other valuation methods, the hedonic method leaves less room for appraiser subjectivity and hence estimated values are less prone to being inflated excessively in rising housing markets. …