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Old 24.06.2017, 19:12
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Re: Parametric Analysis of Rent v. Buy

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OP, you sound like you are really wanting to buy, but since it is unlikely that you would be able to do it right away, as soon as you arrive, you are, in fact, likely to rent first, at least for some months or so, while you are looking for property to buy.
The plan was to rent a few months to start off but I am undeniably excited by the prospect of buying. The mortgage interest rates are tantalizing. I've gotten quotes down to 0.7% and 1.05% for 5 year and 10 year fixed terms, respectively. The monthly mortgage payments are between 30% to 50% of rent for a comparable flat and, of course, ~half of that mortgage payment is a direct investment. From a superficial level it seemed like a no brainier.

This analysis and offering it up for scrutiny is a way to ensure that I keep my head on straight and make the best decision with the facts available to me. Even the parameter modifications recommended by the more financial market savvy commentators have pushed my model into a tossup or worse against expected returns in the stock market for 10 years of ownership.

Thank you everyone for the thoughtful feedback on my assumptions in addition to the both specific and generic words of caution. It's given me a number of new things to consider. I'll likely post again addressing the more specific questions and concerns that various commentators have raised. Prost!
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  #22  
Old 24.06.2017, 20:11
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Re: Parametric Analysis of Rent v. Buy

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The plan was to rent a few months to start off but I am undeniably excited by the prospect of buying. The mortgage interest rates are tantalizing.
And they're fully priced in into the house prices

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The monthly mortgage payments are between 30% to 50% of rent for a comparable flat and, of course
Another 20-30% of comparable rent you'll spend on NK and maintenance and yet another 20-30%, if not more seeing as you come from US, will go to taxes. Sorry for taking your rose-colored glasses off, but landlord's profit margin on rent isn't enviable. Fast appreciation of house prices leveraged up to the gills with cheap mortgages gave pretty good total returns in the past, but I'd not count too much on this trend continuing going forward. If it continues like before, it's pure luck.

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~half of that mortgage payment is a direct investment
Not a particularly good one, you're putting more money in and getting less and less returns out. That's why NPV analysis is more appropriate here to look at the returns on whole investment.
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  #23  
Old 25.06.2017, 09:12
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Re: Parametric Analysis of Rent v. Buy

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If you are leveraged - that is you have a mortgage - then you could say that you are exposed to considerably more risk than being "stuck with some rental contract". Note that if you have enough cash to fully capitalize your loan in case of issues, that's fine, but the vast majority of people don't. Unless you can buy the roof above your head outright, do not make the mistake of believing that you are somehow in control or better off than renting, particularly if you don't do the research OP did. Furthermore, saying something like: "Oh we bought a property as soon as we had the cash and it worked really well for us", is unhelpful because we don't know your precise circumstances, you are one data point (which is *ehm* difficult to extrapolate), and there is no guarantee that your story is truthful (I'm not making any accusations).

The OP did it correctly and they get two thumbs up from me. They did the analysis to the best of their ability. I believe any attempt at a making an informed decision is better than firing blind. It is impossible to cover every edge case and produce a foolproof plan, but it is possible to minimize the risk of a bad decision. This stuff should be taught in high school. Think about opportunity costs before making big decisions, just because something looks better intuitively, it doesn't mean that it actually is better.


This can be said about anything and everything. You can just as well make an unwise decision with property as with anything else. The proper way is to compare the options. Unless you have done the analysis, you have no evidence either way. It is a highly personal thing, some people prefer the "feeling" of owning their own home, and even if they'd be better off investing the cash into something else, they don't want to do it.
You make some good points, though I am unsure why the doubt about the truthfulness of the story.

What I agree with fully is where you say it is a very personal thing. This is definitely my case. I saved up the deposit (I did not have to give anything up or make any sacrifices to do this), found a property that was affordable and went for it, taking basic advice from my own bank, mainly because I no longer wanted to rent. I went for it on the no risk, no fun basis as has been mentioned here. I don't recall seeing more than 3 or 4 properties.

If I had not gone for it (the purchase), I would have less money in the bank overall as I would spend more (around double) each month on renting.

The 20% I had to put down as a deposit is now irrelevant (to me, in my situation) as it is not a large amount. I wouldn't have more money now because of it as I am not an investor, it would just be sitting in the bank doing nothing.

I do fully appreciate it is different for others though who may have a more responsible approach than me, due to the fact they may have investment knowledge, family, commitments, children etc.

I feel I made the right decision for me, as we are able to get our money back out of this property when we are ready and have the option to buy something different, not necessarily in CH (though of course we will pay less tax if we do buy again here).
Moreover you have more rights as an owner-occupier, as opposed to remaining a tenant and having little or practically no say. This was also an important factor for me.

The next time I purchase it will be different, it is something we are currently looking into. I've already seen far more properties than I did first time around and the planning is a lot more complex as my situation is now different. For example I was still single when I made the original purchase, now I'm not. But it will still be a highly personal (even emotional) thing as opposed to an investment. Yes it is an investment too, but investing is not everything. Living is more important. A house is also a home.
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  #24  
Old 27.06.2017, 23:30
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Re: Parametric Analysis of Rent v. Buy

I stumbled upon a relatively short and layman accessible interview with the real estate expert David Blanchett. It is pertinent to the risks of home ownership and reinforces some of the wary feedback I've received here. In case someone else finds it useful, I thought I'd share it here:

http://www.morningstar.com/cover/vid...aspx?id=766921

Notable quotes:
Quote:
real estate is the most valuable asset in the world. It's worth about $217 trillion, and in perspective, the total value of all stocks out there is only $60 trillion, and bonds of about $122 trillion. So, the value of all this real estate really is the largest asset out there.
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So, if you look at the return of homes both domestically and internationally, they increase by about 1% a year over inflation. So if inflation has been, let's say, 3%, homes will go up by about 4% a year. Now, there are some problems though with those numbers. I mean, one big problem with the metrics we use, the House Price Index, is that they are tied to resale value of homes. So, someone sells a home in 2011, it resells in 2016, what is the change in value? Well, a problem there is capital improvement. So, if I were buy a home and try to flip it, put all this money into it, you don't see those expenses in terms of the actual resale value. There's also things like insurance, ongoing maintenance, real estate taxes that really kind of drive that down. So, I think that when you factor in all the costs of owning a home, the realized return is often less than inflation or possibly even negative.
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the risk of an individual home in one area has annual standard deviation of about 12% and if you put that into kind of relative terms, a portfolio that's half stocks and half bonds, has that same level of risk. So, a home by itself is very risky. What compounds the risk is leverage. So, people often buy a home with a mortgage. If you put 20% down on a home, then you have effectively a 5 times leveraged asset with your equity. What that creates is an asset that's about as risky as a 3 times leveraged equity index. So, for a lot of younger households the home is hands down the riskiest asset.
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Old 28.06.2017, 01:06
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Re: Parametric Analysis of Rent v. Buy

I'd be interested to know if anyone can hazard a guess about the extent to which the reasoning and figures of David Blanchett, as quoted in the post preceding this one, might be applicable to the property market in Switzerland.
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Old 28.06.2017, 02:10
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I can't speak to Switzerland's relevance from personal knowledge, but I can point out where Blanchett mentions it in his work. Here is Dr. Blanchett's peer reviewed publication on the subject.

http://search.ebscohost.com/login.as...ite=ehost-live

Title: The Home as a Risky Asset.

Source:
Journal of Personal Finance. 2017, Vol. 16 Issue 1, p7-28. 22p.

Abstract: Despite being one of the most valuable assets in the world and one of the largest assets on many household balance sheets, real estate-in the form of homeownership-presents considerable risks that are generally poorly understood. Through an analysis, we find significant homeownership risks that are primarily idiosyncratic (i.e., not market-related), driven largely by the illiquid nature of owning a single home. We fi nd the risk of homes is approximately double that of city-specific home price indexes (e.g., the S&P Case-Shiller Home Price Indices), with an annual standard deviation of 12%, which is approximately equivalent to the historical volatility of a portfolio invested in 60% stocks and 40% Treasury bills. While the return on house price indexes has exceeded inflation historically (with a real return of approximately ∼1%), the actual real return realized by homeowners, after considering the various costs associated with owning and selling a home, has likely been negative in real terms. Renting is often a better option for many households, especially those households with lower marginal tax rates (i.e., households that do not itemize deductions) and have shorter expected housing durations. We note signifi cant diff erences in the returns, volatility, and market risk of homes and REITs; these differences suggest REITs are a relatively poor proxy for residential real estate from an investment perspective. We also identify the factors, such as home price, county unemployment rate, housing turnover, home size, and even average annual temperature, that can diff er by region and are strongly related to the returns, volatility and market risk of homeownership. Many households may use this factor information to better approximate the risk of their homes. Overall, the impact of owning a home on the optimal total wealth financial portfolio is likely to vary significantly by household, based on the unique risks associated with the home, household wealth, and other non-financial household assets.

Points of interest (its not letting me insert images):
  • Figure 3, pg 14. Plots median return from buying and the probability of being better off from buying based on different tax rates.
  • Figure 4, pg 17. Plots annualized standard deviation vs holding years.
  • Figure 8, pg 18. Plots real return vs standard deviation for a number of countries from 1975 to 2015. Switzerland and the US fall in a similar location (~1.2 % real return, ~4% STD).
  • In Table 2 (pg 22) it the paper displays some international data comparing returns for House Prices vs REITs (~Real Estate ETFs). A key takeaway from this paper is that REITs are largely irrelevant to homeownership returns & risk. In Switzerland, like most other countries, there's very little correlation between the two. In fact, according to this analysis, over the last 35 years Switzerland has been one of the worst places to buy (in terms of investment returns).

For a complete list of his publication history:
http://www.davidmblanchett.com/research

If that link doesn't work, I attached the PDF.

(sometimes I forget how fortunate I am having access to just about every journal!)
Attached Files
File Type: pdf The Home is a Risky Asset.pdf (1.70 MB, 864 views)

Last edited by 3Wishes; 28.06.2017 at 23:04. Reason: merging consecutive replies
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Old 28.06.2017, 09:53
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Re: Parametric Analysis of Rent v. Buy

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I stumbled upon a relatively short and layman accessible interview with the real estate expert David Blanchett. It is pertinent to the risks of home ownership and reinforces some of the wary feedback I've received here. In case someone else finds it useful, I thought I'd share it here:

http://www.morningstar.com/cover/vid...aspx?id=766921

Notable quotes:
It's more risky in CH as you can be asked to make cash calls on falls in value in property. In the UK, you can just ride out falls in value by continuing to pay the mortgage.
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Old 28.06.2017, 10:28
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Re: Parametric Analysis of Rent v. Buy

Fantastic all these graphs and figures, but when you own you can decide to paint the walls whatever colour, to istall 10 washing machines, bang a nail into the wall.

There are so many more things to owning than just money and worrying about "return on investement" try living, i wonder what value people can put on this ?
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Old 28.06.2017, 11:38
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Re: Parametric Analysis of Rent v. Buy

Just a couple of points:

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The plan was to rent a few months to start off
Be aware that the rental market in Switzerland is very tight, and outside of corporate short term flats you may well find that you need to sign a lease of at least a year, and that restrictive termination conditions are common. Yes, you can always find a sub tenant, but you should factor the cost and hassle of all this into your equation. Better yet, plan on renting at least a year.

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I can't speak to Switzerland's relevance from personal knowledge,
This is the glaring fault in all your analysis.

As most of us have said - from personal knowledge - the Swiss market is not like others.

I've bought and sold in other countries, quite successfully. I'm not a newbie to ownership. Yet I made a mistake in buying here.

I bought in one of the most sought after areas of the country, bought at a decent price before the insanity of the boom years. Although the current prices in the area are down from the boom, most properties have held their value. Now we are starting to see a second boom in the luxury market- any available space is being turned into villas for gazillionaires.

In other markets selling a property like mine to meet upscale demand would usually mean a goldmine, right?

Not here, though. Our Quartier has an iron-clad Gestaltungsplan meaning that there is no possibility of turning our little normal houses into the luxury villas that the incoming gazillionaires want. And folks who want normal houses like mine tend not to feel comfortable in a village full of gazillionaires. If you look at the stats in my area you'd think that demand is high, prices are rising. While this is true for the villas, the demand for a 'normal' house in this booming area is actually weak. Unless you know the area well you'd not see this from the stats.

So my house is now something of a white elephant. I will likely not make a profit from the sale of my house, and might end up with a paper loss thanks to Uncle Sam.

This is the kind of local knowledge that defies your spreadsheets. I cannot caution you strongly enough - buying without truly understanding what makes the Swiss - and thus the Swiss market - tick can leave you with some expensive surprises.

I'll repeat what I wrote in my earlier post: In Switzerland your home is not your castle. The myriad of restrictions to what you can do, how you may live, the power your neighbors hold over your use and enjoyment of your property is difficult for an American to wrap his head around.

If you have a couple of million (because even a 'normal' house can cost that) to gamble away, go ahead. But if not, wait. Buy when you know more about Switzerland.

Last edited by meloncollie; 28.06.2017 at 12:15.
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Old 28.06.2017, 17:31
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Re: Parametric Analysis of Rent v. Buy

One more thing:
You may simply not like it here and leave the country within a few years. Though that's not too likely you'd be far from the only one. In such a case all the costs that come with a sale/purchase may well eat most, if not all, profit you have made by owning rather than renting.
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Old 28.06.2017, 21:05
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There are so many more things to owning than just money and worrying about "return on investement" try living, i wonder what value people can put on this ?
I get it, I do. By focusing on the financial aspects in my last couple posts I'm not dismissing the others. I just am working to establish a quantitative financial backbone so that when I layer on the qualitative and inherently emotional value of home ownership I can make a balanced, informed decision.

But you're right, I haven't commented on that value for us - me & my longterm European girlfriend. For us, it would be about the freedom to make our residence our home and the long term security.

We have lots to consider. Thanks for your feedback.

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Better yet, plan on renting at least a year.
A good idea. I was thinking 6 months at minimum. (I've found a couple potential sublets and Airbnb's suitable for several months)

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This is the glaring fault in all your analysis. As most of us have said - from personal knowledge - the Swiss market is not like others. I've bought and sold in other countries, quite successfully. I'm not a newbie to ownership. Yet I made a mistake in buying here.
Thank you for sharing your Swiss home buying experience. This makes is sense. It is also a great example of the idiosyncratic and uniquely local risks Dr. Blanchett refers to.

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If you have a couple of million (because even a 'normal' house can cost that) to gamble away, go ahead.
This is not me. A downpayment for an apartment would be about half of my savings. I agree that I have to be very cautious, thanks again for your feedback.

Last edited by 3Wishes; 28.06.2017 at 23:01. Reason: merging consecutive replies
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Old 28.06.2017, 21:54
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Re: Parametric Analysis of Rent v. Buy

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Fantastic all these graphs and figures, but when you own you can decide to paint the walls whatever colour, to istall 10 washing machines, bang a nail into the wall.

There are so many more things to owning than just money and worrying about "return on investement" try living, i wonder what value people can put on this ?
you can do that anyway when you rent. just revert everything before you hand it back.
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Old 28.06.2017, 23:19
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Re: Parametric Analysis of Rent v. Buy

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you can do that anyway when you rent. just revert everything before you hand it back.
....true,my daughters bedroom is pink,purple and white, i kid you not...

lets not talk about the turquoise and pink kitchen.

Happy, yes very, give a shit, no not at all !

I live, do i care about "return on investment" or if it's cheaper to do this rather than that.

Draw your own conclusion
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Old 28.06.2017, 23:19
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Re: Parametric Analysis of Rent v. Buy

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...I'll repeat what I wrote in my earlier post: In Switzerland your home is not your castle. The myriad of restrictions to what you can do, how you may live, the power your neighbors hold over your use and enjoyment of your property is difficult for an American to wrap his head around...
Just a few anecdotes to illustrate this.

One of our friends wanted to plant a tree behind the house. That required permission from the neighbors, as the tree was projected to grow to X meters tall, which might then cast a shadow over the neighbor's vegetable garden. The tree had to be located further away from the property line than originally planned, even though it wasn't exactly close to begin with.

Another friend wanted to put up one of those small, brick barbecue grills just off the back patio (someone else had a thread on this recently too). Again, the neighbors got to have their say on where it was located, and which direction it would face with respect to the most common winds, so that they would not be disturbed by the smoke.
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Old 29.06.2017, 03:13
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Re: Parametric Analysis of Rent v. Buy

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Just a few anecdotes to illustrate this.

One of our friends wanted to plant a tree behind the house. That required permission from the neighbors, as the tree was projected to grow to X meters tall, which might then cast a shadow over the neighbor's vegetable garden. The tree had to be located further away from the property line than originally planned, even though it wasn't exactly close to begin with.

Another friend wanted to put up one of those small, brick barbecue grills just off the back patio (someone else had a thread on this recently too). Again, the neighbors got to have their say on where it was located, and which direction it would face with respect to the most common winds, so that they would not be disturbed by the smoke.
Well it is a long time ago since I studied common law but I do remember that there was a large body of case law to support the concept that you can't do something on your property that would prevent your neighbors from enjoying the use of their property. So while it is not as codified as civil law, it is not a free for all either.
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Old 29.06.2017, 07:05
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Re: Parametric Analysis of Rent v. Buy

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Well it is a long time ago since I studied common law but I do remember that there was a large body of case law to support the concept that you can't do something on your property that would prevent your neighbors from enjoying the use of their property. So while it is not as codified as civil law, it is not a free for all either.
... and Switzerland, being a civil law country, is more codified than most... is that what you mean?
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Old 29.06.2017, 09:34
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Re: Parametric Analysis of Rent v. Buy

The Trends in Swiss Real estate Study by Credit Suisse


Swiss Real Estate Market 2017


In the 17th edition of the real estate market study, Credit Suisse real estate experts share their views of the Swiss real estate market, highlight the current trends, and predict developments in Switzerland’s most important real estate segments.


Residential Property – an Era Comes to an End


The prices of residential property have gone down since last year. An era of price growth in the residential property sector is therefore coming to an end after 14 years. However, at -0.8%, the reduction is still within normal limits. Still, there are differences in price developments both regionally and in relation to property standards. Whereas the prices in the top-end segment are correcting significantly and in the middle segment slightly, there has been a marked increase in prices in the lower end. But despite sinking prices, the residential property segment is stable, according to the CS real estate experts. In contrast to other markets, there is no present or foreseeable oversupply. This is because the promoters of residential property recognized at an early stage that the high prices in combination with tightened financing guidelines were curtailing and partially deflecting demand.


Despite the restrained expansion of supply, however, the market environment is not getting any easier for residential property. A growing number of households are no longer able to shoulder the financing of residential property due to the increased financial requirements. This is particularly the case in the centers and in prime locations. Since prices have recently risen sharply in peripheral regions as well, this situation is increasingly common there too. The low mortgage interest rates are in this sense merely an optical illusion for many households. Demand in the current year will therefore continue to concentrate more on regions with prices that are still affordable, as well as the low and mid-priced segments. While we expect further price rises in these regions, the prices in high-priced regions and generally in the high-priced segment are expected to fall further, albeit at a slower rate. The only remaining alternative, where real estate prices are still affordable, is regions outside of the urban agglomeration. Overall, real estate economists are expecting a reduction of residential property prices of no more than 0.5% in 2017.


Demand in the current year will therefore continue to concentrate more on regions with prices that are still affordable, as well as the low and mid-priced segments.


Trend towards Single Living in the Microcosm


Single-person households have really caught on in Switzerland, where they are now the most common type of housing. Regardless of whether or not people are in a relationship, many prefer to have their own home. Due to the high rental prices in city centers for example, some people even accept smaller living space. Microapartments are an innovative residential concept that has recently arisen from the trend toward single living. These are optimally tailored to the needs of many single households in terms of zeitgeist and requirements.


Tenants Wanted


Unlike the residential property market, the rental market is in decline. That is not going to change in 2017. The negative interest environment prevailing for over two years and the investment crisis resulting from this are driving the construction of rental property to very high levels – despite the fall in demand due to lower immigration. Thanks to the economy's gradual recovery from the Swiss franc shock, we do not expect any further decline in immigration. Nevertheless, the structural trend toward lower tenant purchasing power is set to continue because immigrants increasingly come from poorer countries and well-off Swiss households are switching to home ownership.
Vacancies and days on market are set to increase further, and marketing to become more difficult. Predatory pricing to compete for tenants will therefore intensify. While risks in the market are thus rising for the landlord, tenants are likely to have an easier time finding accommodation and will increasingly benefit from lower rents. The oversupply will be more closely felt in the agglomerations in the future, as construction activity is being stepped up primarily in these communities. Housing will remain scarce only in the urban centers, where the lack of land and a high regulatory burden are hindering the growth of supply.

Other focal points of the 2017 real estate study are the office and retail space market, real estate investments, and analysis of data centers, rental market regulation in Stockholm, and the effects of digitalization.
Download complete report
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Old 29.06.2017, 09:51
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Re: Parametric Analysis of Rent v. Buy

Endless financial calculations, (very genuine) potential neighbor issues, etc etc apart, do you want to block a large sum on a non-liquid asset class you are (probably) unfamiliar with?

I rented for the first year, and purchased in an entirely different area in the second year.
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Old 29.06.2017, 10:44
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Re: Parametric Analysis of Rent v. Buy

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The only way to get out of that is to supply the landlord with equivalent tenants who are willing to take over the rental contract.

Having said that, there is a shortage of accommodation, so you are fairly likely to be able to find replacement tenants when you want to leave. That is, unless you have rented someting totally awful or with an exhorbitant rent (for what the property is).
The CS article quoted reflects my experience a lot better than this. Before moving to the mountains I lived on the silver coast in canton Zurich for nearly 16 years. The detached house I built with my ex sold within weeks and attracted a bidding war. The 3.5-room garden flat with great views that I inherited from my mother proved to be really difficult to let out; I did eventually sell it but it took much longer than the house and I ended up accepting an offer about 5% less than asking price and throwing in a second garage space to secure the sale. The first flat I rented after my marriage broke up the landlord found a Nachmieter but I only had 2 viewings. The second flat I rented, which is the one I left in March (giving regular notice) is still sitting empty 3 months on, even though the location and views are great and the price is one of the most bang-for-buck in the village.

In the low interest rate environment - and I suspect especially with the Bank of England starting to murmur about raising rates, which will impact on LIBOR on which many mortgages here are based - I get the feeling that people are looking to buy rather than rent, to lock in a low interest rate for as long as possible while rates are still low and therefore to buy as big a place as they can possibly afford, with a view to family space. That's just a gut feel from my experience, mind.

In short, don't count on it being hugely easy to find a Nachmieter, and reckon on having to work with (and pay until) ordinary notice periods when you want to stop renting.
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Old 29.06.2017, 12:45
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Re: Parametric Analysis of Rent v. Buy

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Just a couple of points:


Not here, though. Our Quartier has an iron-clad Gestaltungsplan meaning that there is no possibility of turning our little normal houses into the luxury villas that the incoming gazillionaires want.

This is the kind of local knowledge that defies your spreadsheets. I cannot caution you strongly enough - buying without truly understanding what makes the Swiss - and thus the Swiss market - tick can leave you with some expensive surprises.

I'll repeat what I wrote in my earlier post: In Switzerland your home is not your castle. The myriad of restrictions to what you can do, how you may live, the power your neighbors hold over your use and enjoyment of your property is difficult for an American to wrap his head around.

If you have a couple of million (because even a 'normal' house can cost that) to gamble away, go ahead. But if not, wait. Buy when you know more about Switzerland.
As OP is from the USA. Imagine that each Swiss town is a big homeowner associations, also think that each canton is a big homeowner association, and in the end Switzerland is a big homeowner association. Sometimes more relaxed then an US HOA would be, some times with the same drawbacks and issues. And as in meloncollie case you may be part of an actual real HOA, where even the topic of new mailboxes can be the source of lot of discussion and wasted money.

Speaking of which, happy with the "new" mailboxes?
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