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Old 29.04.2013, 23:06
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is the Swiss property market going to fall, too?

I've just had my first introduction to buying property in Switzerland and I have some serious concerns from a macro-economic perspective. I'm no economist (but an engineer), but I hope to find some here to clear the clouds

As I understand buying the property goes like this:
- you pick the house, let it be 1M CHF for ease on numbers
- you need to provide a down payment/deposit of 10-20%, let's do 10%, 100k
- you will get 2 mortgages, the "Hypothek 1" being about 80% (800k) of the property value and the "Hypothek 2", being the rest 10% (100k).
- you will pay the Hypothek 2 slowly (20+ years?) back, according to your contract. This is why your mortgage is cheaper than renting the same place.
- whenever you paid back your Hypo 2, you will start to pay back Hypo 1, at which point most swiss just sell/let their apartment and/or move over to a bigger/more expensive one or buy another one and start paying Hypo 2 on the new one instead.

Please correct me if I'm wrong up to here.

And there's the catch. In conclusion, the vast majority of the country's property is owned by the banks in never-ending mortgage claims. Which means on one side they are sitting on an "Eierlegende Wollmilchsau", a fortune of value on a constant money flow-in. On the other hand, because people never pay their property fully, and this process is considered a smart move financially, everyone will do it as soon as they can, this beats up prices quite a bit => there you got a nice bubble of real estate prices. What happens if prices would drop, eventually considerably?

This concept is doable as long as
- there are always emigrants (I see this as granted for some years -10+- to come, however, slowly decreasing in numbers)
- the property prices are going up or at least don't deteriorate => have we seen this somewhere before?
- the SNB will not raise the base rate, because that would be a killer to all those mortgages. I don't believe this is gonna happen soon as they are quite fighting for the opposite at the moment.

BUT. I don't quite see the catch, why would prices go any lower, knowing Switzerland is a safe haven both politically and financially, and real estate is finite. That said, I'm quite tempted to jump the same train, but I have a gut feeling that it's somewhere conceptually flawed, and the whole country is paying the same game. Where?

I ask you to think loud with me, you'll surely see what I don't.
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Old 29.04.2013, 23:11
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Re: is the Swiss property market going to fall, too?

Normally you will need a 20% deposit.

Hypo 1 will be for 65%
Hypo 2 will be for 15%

Hypo 1 will probably never be paid off, if your children can't pay the mortgage when you die, or you can't pay the mortgage when you retire you have to downsize.

Hardly owning property at all IMHO, just a high risk form of renting.
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Old 29.04.2013, 23:30
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Re: is the Swiss property market going to fall, too?

You'll need 20% down payment in hard cash to the penny.

The rest 80% will slowly be re payed during years and years (almost never) because you'll be able to claim some tax off of it as you'll be in debt.

Bubble scare has been on the talk for good few years now, hardly any on the horizon? (except few ultra expensive places in GE)
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Old 29.04.2013, 23:32
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Re: is the Swiss property market going to fall, too?

You don't have to get 2 mortgages, we just have one, all on LIBOR.
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Old 29.04.2013, 23:37
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Re: is the Swiss property market going to fall, too?

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You don't have to get 2 mortgages, we just have one, all on LIBOR.
I suspect you only borrowed 65% then........The second one will be more expensive, both can be linked to LOBOR.
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Old 29.04.2013, 23:39
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Re: is the Swiss property market going to fall, too?

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I suspect you only borrowed 65% then........The second one will be more expensive, both can be linked to LOBOR.
No, just 80% down. Maybe we could do something different as we both work for the bank we borrowed from.
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Old 29.04.2013, 23:42
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Re: is the Swiss property market going to fall, too?

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No, just 80% down. Maybe we could do something different as we both work for the bank we borrowed from.
I assume you mean 20% deposit / downpayment rather than 80%.
What happens if you change your job, do you need to find a new lender?
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Old 29.04.2013, 23:44
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Re: is the Swiss property market going to fall, too?

20% down, doesn`t have to be all hard cash can you use your 2nd pillar (and I think 3rd but don`t have one). Can pledge the pension (they only take it in default) or cash it in (the you pay income tax).

House prices can not continually rise at a pace higher than the rate at which wages go up. Eventually no one can afford the houses, prices have to stabilize or drop.

Interest rates are low while the world is in the economic poo poo. If that ever changes they will likely rise, they can`t fall any lower, I think. When/ if they rise those on a libor could be wishing they locked in a long term low rate. Unless of course they have liquid investments and they can pay mortgages off.

The bank generally expects you to get to 40% equity by the time you retire. This seems socially normal although you can certainly pay off more should you choose to.

Interest is tax deductible but they add the rental value of your property to your income, wiping out in theory any tax advantage.

We also were never told we had to have two mortgages. They gave us a list of rates and time periods and advised us to split them up as when they renew you may or may not like rates at the time. We choose 1/3 at 2 years and 2/3 at 8 years, 2 years ago. All the mortgage on Libor was not an option and not something I would have felt comfortable with anyway.
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Old 29.04.2013, 23:44
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Re: is the Swiss property market going to fall, too?

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I assume you mean 20% deposit / downpayment rather than 80%.
What happens if you change your job, do you need to find a new lender?
Yes 20% sorry! 80% I wish

If we both left we would be given the option to stay at the regular customer rate or change to another lender, yes.
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Old 30.04.2013, 00:04
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Re: is the Swiss property market going to fall, too?

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Bubble scare has been on the talk for good few years now, hardly any on the horizon? (except few ultra expensive places in GE)
And Zürich, Basel and Winterthur downtown aside from all lakeside apartments
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Old 30.04.2013, 00:08
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Re: is the Swiss property market going to fall, too?

Hopefully, yes!

Tom
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Old 30.04.2013, 00:10
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Re: is the Swiss property market going to fall, too?

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House prices can not continually rise at a pace higher than the rate at which wages go up. Eventually no one can afford the houses, prices have to stabilize or drop.
I fear this is quite the opposite. Wages are coming lower due to all immigrants (me being one myself), housing is getting more expensive, for the same reason.

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The bank generally expects you to get to 40% equity by the time you retire. This seems socially normal although you can certainly pay off more should you choose to.
Do you know any other country on Earth where you are not even supposed to pay off your property (eg the tax system is against this)? To me this sounds very toxic in the long (20+yrs) run.
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Old 30.04.2013, 00:15
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Re: is the Swiss property market going to fall, too?

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Do you know any other country on Earth where you are not even supposed to pay off your property (eg the tax system is against this)? To me this sounds very toxic in the long (20+yrs) run.
Japan has 100 year mortgages & look what has happened to Tokyo property over the last 30 years......Toxic is hardly a strong enough word to describe the problem, of course everybody said about Tokyo property & the Japanese stock market 'It's different this time' limited supply & all that crap! Just like the euphoria of internet stocks that will change the world.
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Old 30.04.2013, 00:15
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Re: is the Swiss property market going to fall, too?

two properties, two mortgages structured how I want them. One more than pays for itself, my architect is renting it. The other saves me 3K a month compared to what I'd be renting it for.

The system makes not paying off sensible. Tax is in your favour if you don't own.

Having said that, 50m up the road is a neighbour with a Bentley Continental, F12, some other Ferrari and an Aston - switching between Monaco and Geneva plates. Domiciled in MC, I'm sure....

And the cars are worth together around what the bank sees the risk/auction value of my house.

It's quite some 50m distance!
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Old 30.04.2013, 00:22
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Re: is the Swiss property market going to fall, too?

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I fear this is quite the opposite. Wages are coming lower due to all immigrants (me being one myself), housing is getting more expensive, for the same reason.

Do you know any other country on Earth where you are not even supposed to pay off your property (eg the tax system is against this)? To me this sounds very toxic in the long (20+yrs) run.
It can`t possibly be the opposite. If the average wage falls, and prices rise further there will simply be less and less people who pass the bank approval process. Prices don`t have to tumble down but they do have to stop rising at some point unless wages rise. Where that point is is the big question.

The tax system is not against paying off the mortgage. You deduct the interest, you get lumped with additional income, net effect neutral. It`s an unusual way of doing it but Australia, as one example, you can not deduct mortgage interest on your house of residence, effectively the same deal. Yet culturally Aussie`s pay off houses before retirement.

I can only assume the difference is Swiss people with traditionally low interest rates keep mortgage balances while saving assets invested at higher interest rates which would be a net positive? This wouldnt work in Australia, USA, or the UK as the average Joe is not a good planner/ saver.
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Old 30.04.2013, 00:39
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Re: is the Swiss property market going to fall, too?

As was mentioned, some areas have seen big price rises so are probably vulnerable. Other areas, mostly rural, have not seen big price changes so may well be OK.

Everybody is forecasting the Europen central bank will cut interest rates this week. Be interesting to see the impact of this on Swiss "fixed" mortgage rates which have been creeping up this year for no apparent reason in contrast to flexible LIBOR rates which have drifted down.
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Old 30.04.2013, 00:58
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Re: is the Swiss property market going to fall, too?

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It can`t possibly be the opposite. If the average wage falls, and prices rise further there will simply be less and less people who pass the bank approval process. Prices don`t have to tumble down but they do have to stop rising at some point unless wages rise. Where that point is is the big question.
Generally speaking salaries in Switzerland don't rise, they stay the same or increase by 1% or less due to inflation. Rising salaries has nothing to do with rising property prices, you will notice the turning point was allowing foreigners with a B permit to buy, until fairly recently you needed a C permit to buy. If the rules change again expect sharp falls.
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Old 30.04.2013, 09:44
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Re: is the Swiss property market going to fall, too?

Here goes:
- typically at point of purchase - 20% deposit, 15% 2nd mortgage, 65% 1st mortgage
- before retirement 2nd mortgage must be paid off
- 1st mortgage doesn't have to be paid off until property is sold
- Typically the Swiss will then save cash/stock/other instead of paying down the capital on the property.

And the reason goes like this:
- If you have a 650,000chf mortgage it would cost around 20,000chf to pay interest on
- If you have a pension pot of 650,000chf it will pay out around 32,000chf.

The Swiss have noted that 32,000chf is greater than 20,000chf and so having an increased pension pot (instead of an asset) is a better idea.

Based on a 50 year property value increase of 400% - if you buy when you are 35 - and move out in a box 50 years later - your 65% mortgage will end up being 16.25%
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Old 30.04.2013, 10:02
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Re: is the Swiss property market going to fall, too?

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And the reason goes like this:
- If you have a 650,000chf mortgage it would cost around 20,000chf to pay interest on
- If you have a pension pot of 650,000chf it will pay out around 32,000chf.
Surely the Eigenmietwert is another factor in favour of the mortgage calculation (by reducing the tax you have to pay on your property) ?
On the other hand: The (2nd pillar) pension conversion rate is being reduced over the past years, thus assuming today's conversion rate seems to be quite optimistic. A pension pot that would pay out 32k annually today may only pay out 25k if you retire 5 or 10 years from now.
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Old 30.04.2013, 10:14
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Re: is the Swiss property market going to fall, too?

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Normally you will need a 20% deposit.

Hypo 1 will be for 65%
Hypo 2 will be for 15%

Hypo 1 will probably never be paid off, if your children can't pay the mortgage when you die, or you can't pay the mortgage when you retire you have to downsize.
Agree. Although you can use pension and 3rd pillar to off-set Hypo 2. Also, if you save you can pay off some of Hypo 1 as you go along and reduce the risk here.

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Hardly owning property at all IMHO, just a high risk form of renting.
Don't agree. It really depends on what your needs are. We need minimum 6 room house (flats that big are like fairy dust) near Basel. Try getting that, in a decent location for a price that doesn't make you wince.

I think you (Fatmanfilms) are looking at it from a short-to-midterm investment point of view, which is the wrong way of looking at it if you are an individual (for corporations/businesses or pension groups it is another matter). Most homeowners in CH buy with a long-term point of view.

Generally your needs for a large house will usually diminish as you get older. In our case, we will hopefully get the children out, have paid off Hypo 2 and some of Hypo 1, and with an increase in value (yay if 400%!) will come out with some spare money to buy a smaller and more manageable property for our retirement.

For the OP - think about building if you can't find what you need 2nd hand. Although probably more stressful in the short term, you get a brand new house, semi-built to your specification (depending on the contract you have). Usually this costs around the same as a built house purchase.
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