Review of the 102nd Swiss Real Estate Talk
"Interest rates down, all good?". This was the title of the real estate industry's second discussion in Bern, and this time it was not just with itself. Also represented on stage: The Swiss National Bank.
More than ever, discussions in the real estate industry revolve around the central bank's interest rate policy. But how about changing roles, the organizers of the Swiss Real Estate Talks asked themselves. Instead of always talking about the SNB - why not talk to it? This is what happened at the 102nd edition of the Real Estate Talks, which took place in Bern. Robert Bichsel, who is responsible for the banking system and financial market stability on the SNB's Governing Board, was on stage. Anyone expecting even the slightest hint about the next interest rate decisions was - naturally - disappointed. Instead, Bichsel used the industry's attention to go into the fundamentals. And this also sent a message.
The reason why the central bank is concerned with the real estate market at all is the stability of the financial system. More than two thirds of the last 50 systemic banking crises were the result of real estate bubbles bursting. The cost of resolving a crisis in the housing market can be gigantic. Bichsel had brought along two graphs that make an impression when placed side by side: One curve showing long-term interest rates on Swiss government bonds was pointing downwards, while the other, showing mortgage debt as a percentage of GDP, was pointing steeply upwards. With a small catch, of course, which was due to the rise in interest rates in recent years. The price indices for Swiss residential real estate are also worrying. They are rising at a similarly steep rate, with prices up by around 60% compared to 2008.
"Certain fragility"
So how does the SNB view these figures? It asks how much of it can be explained on the basis of hard economic facts. Bichsel currently puts the range of uncertainty in the price trend at up to 30% - reason enough to speak of a "certain fragility" in the system. All it would take is a shock, for example a recession, then a "very substantial correction" cannot be ruled out. Nevertheless, the situation is not dramatic, emphasized the SNB director. According to the central bank, the banks are currently stable and have financed the Swiss housing boom with a great deal of discipline.
Bichsel also mentioned two other things. Firstly, the SNB does not currently see any indications of a credit crunch. Secondly, the world of low interest rates is not God-given. There are plenty of examples in history where monetary authorities have been surprisingly brash in raising interest rates. Bichsel recommends: You should be able to absorb a surprising rise in interest rates. "Such shocks can happen," emphasized Bichsel in the panel discussion. And they can also come from outside to a certain extent, without the intervention of the domestic central bank.
"Double airbag"
A good addition to this high-level view of the topic was a look at an individual player. Roman Bürki, Head of Real Estate at the PK der Technischen Verbände, let us take a look at his cards and showed in detail how many places the interest rate level influences calculations and returns. Not that Bürki presented rising interest rates as categorically disadvantageous from a pension fund perspective. But one of the impressive calculation examples he presented was the valuation calculation for an existing property. An increase in the discount rate of 0.64 percentage points over ten years means that the rent must increase by 39% percent over the same period - if the value of the property is not to shrink. And if this is not offset by higher rents, the operating costs would have to fall to an illusory zero francs. Reducing the vacancy rate cannot fully compensate for the decline in value in the example in question. Anyone who had not previously understood why the real estate market does not particularly appreciate rising interest rates understood it after Bürki's presentation. The representative of an investor, mind you, who finances properties and projects without a loan. In the words of moderator Björn Zern, an investor with a double airbag - with 100 % equity and a valuation buffer that survived the previous rise in interest rates unscathed.
"Pressure in the boiler"
The valuation buffer was also discussed by Stefan Fahrländer. In his presentation, the founder of the consulting firm FPRE highlighted, among other things, the fact that the books of Swiss real estate companies have absorbed the recent rise in interest rates with only minor devaluations. Only small developers and those who had bought recently had difficulties with the rise in interest rates. In another respect, the slightly higher interest rates actually provided some relief - the higher reference interest rate took some of the pressure off tenants and therefore off politicians. But interest rate turnaround or not, the situation on the Swiss housing market is far from "all good" in the view of spatial planner Fahrländer. The pressure in the boiler, the housing shortage, is increasing and apartments cannot be built where they are most urgently needed. From the expert's point of view, the honest and demand-oriented solution - new building zones in the conurbations with very high density and zoning out many times this area on the periphery - is likely to be politically difficult to implement.
"Hardened fronts"
On the evening of the lecture, it was repeatedly the social and political perspective that clouded the overall picture. This was also the case with Lukas Golder's presentation. According to the co-director of the Bern-based political research institute GFS, concerns about high housing costs are now almost comparable to the fear of unemployment in earlier times. And this is accompanied by a second important observation by Golder: the fronts between tenants and landlords have hardened and there is a deep mistrust of the real estate sector as a whole. The communications expert warns that the conflict could escalate further in the media in the metropolitan areas and that the turnaround in interest rates is "bittersweet" at best against this backdrop. Golder believes that confidence in the market as a whole is at risk.
Dialogue is therefore important, and it is important that the real estate industry maintains eye contact with the big picture in which it is embedded. And this seems to work particularly well at the Bern venue. It is therefore a good thing that the federal city has been given a permanent place in the Real Estate Talks calendar. This was announced by the two initiators of the Bern discussion series, Harald Zeindl from Galledia Fachmedien and Boris Szélpal from Bern University of Applied Sciences.
