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Swiss government launches plan to stop rising rents

Summary:
Switzerland, where only 36% of the population own their homes, is sometimes referred to as a nation of renters. So when rents rise, as they have recently, the subject becomes political. On Wednesday, Switzerland’s Federal Council announced that it was looking for ways to temper short term rent increases. © Yiu Tung Lee | Dreamstime.comAcross Switzerland, 64% of the population was renting their homes in 2020. The percentage of people renting ranged from 85% in Basel-City to 42% in the canton of Appenzell Innerrhoden. In Geneva the rate was 82% and in Zurich it was 63%. Since 2008, Switzerland has had a mechanism, included in many lease agreements, that links rents to average mortgage rates. The logic is that the benefits of lower costs should be shared with renters. On the other

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Switzerland, where only 36% of the population own their homes, is sometimes referred to as a nation of renters. So when rents rise, as they have recently, the subject becomes political. On Wednesday, Switzerland’s Federal Council announced that it was looking for ways to temper short term rent increases.

Swiss government launches plan to stop rising rents
© Yiu Tung Lee | Dreamstime.com

Across Switzerland, 64% of the population was renting their homes in 2020. The percentage of people renting ranged from 85% in Basel-City to 42% in the canton of Appenzell Innerrhoden. In Geneva the rate was 82% and in Zurich it was 63%.

Since 2008, Switzerland has had a mechanism, included in many lease agreements, that links rents to average mortgage rates. The logic is that the benefits of lower costs should be shared with renters. On the other hand, if interest rises then landlords can bump up rents. Every quarter, a new reference rate is calculated by rounding the average mortgage rate to the nearest quarter of a percent.

The mechanism was uncontentious for many years after its introduction – interest rates were falling. Between 2008 and 2022 average mortgage rates fell from 3.43% to 1.17%, which moved the reference rate from 3.50% to 1.25%.

However, now that the shoe is on the other foot – average interest is now 1.59% and the reference rate is 1.50% – renters are feeling the heat. As low rate fixed mortgages end and are refinanced the average mortgage rate is set to rise. On 1 September 2023 the average rate was 1.59%, which rounds to 1.50%. If the average rate on 1 December 2023 reaches 1.63% then the reference rate will jump to 1.75%. The last time it was this high was in March 2017. Some interest rate watchers expect the reference rate to hit 2.00% in 2024.

These shifts in the reference rate added to inflation adjustments could push rents up 15% over a relatively short period of time.

Exactly how the government plans to intervene is not clear. In September 2023, parliament rejected a call for a moratorium on rent increases proposed by the left.

There are well defined (and rather complicated) formulas and rates that can be used to determine whether the rent someone is charged is considered excessive. Tenants can sometimes force landlords to reduce excessive rents. These formulas contain the reference rate, a risk premium and rates designed to cover running, maintenance and administrative costs. Currently, rental yields (annual rent divided by value) of more than 3.25% (4.50% for the oldest buildings) can be deemed excessive.

The Federal Council has asked the Federal Department of Economic Affairs, Education and Research (EAER) to come up with a detailed proposal to be discussed and hopefully finalised next summer. Tweaks to the calculation of excessive rent have already been recommended, such as reducing the degree to which inflation adjustments can be applied to the value of a property.

However, fiddling with the definition of excessive rent ignores a broader diagnosis. Home construction in Switzerland has failed to keep pace with demographics and has long been limited by a scarcity of available land. A successful referendum in March 2013 to restrict land use further reduced the amount of land available for building. The plan passed with a majority of 54.3%. In Geneva, the Swiss canton with the tightest real estate market (alongside Zug), 79.1% voted in favour of the initiative.

In the three years to 2022, Switzerland’s population rose by 210,000, roughly the population of Geneva City. Net immigration over this period was equivalent to 82% of this total.

More recently, higher interest rates and the rising cost of building materials have made investing in the construction of new homes less attractive. Restricting how high rents can rise will only add to disincentives to build the homes needed to house Switzerland’s growing population.

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