Rent or Buy? - The Expat's Swiss Housing Odyssey
Monaco, Hong Kong, Singapore, Switzerland, and Luxembourg are the countries with the highest real estate prices in the world. They have limited land availability in common and are known for a high living standard and stable economy. This leads to a constant high demand for real estate and therefore to high purchasing prices.
When expatriates are sent to other countries for work the decision between renting an apartment and buying a house becomes a significant decision, and in a country like Switzerland, renowned for its high living standards and picturesque landscapes, but very high real estate prices, the choice becomes even more nuanced.
In this article, we'll explore the financial aspects of living in Switzerland, comparing the costs of renting an apartment over five years to those associated with buying one. The comparison will include rent payments, mortgage interest, maintenance costs, and taxes on capital gain, when selling the apartment again after a period of 5.5 years.
Renting an Apartment in Switzerland
Switzerland is known for its stable and prosperous economy, but it comes with a high cost of living. Renting an apartment is a common choice for those who prioritize flexibility and aren't ready to commit to a long-term investment.
Over five years, the average rent for a four and a half bedroom apartment in cities like Zurich, Geneva, or Bern can easily amount from CHF 200’000 to CHF 450’000 - a substantial sum. Monthly rent in Switzerland is relatively high, and while renting provides the freedom to relocate easily, it also means that the money spent on rent does not contribute to building equity. According to the most recent study of Credit Suisse’s market specialists, due to the strongly reduced construction activities, which has been the result of a law change towards a more efficient spatial planning, the housing shortage will further exacerbate and drive up rents.
Buying a House in Switzerland
Purchasing a home in Switzerland involves navigating a competitive real estate market and understanding the financial implications of homeownership. Let's break down the key factors involved in buying a house.
Mortgage Interest
Despite recently increased interest rates, Swiss mortgage rates have historically been low, and are very attractive compared to other countries. This makes homeownership a serious option for those who can secure a mortgage.Maintenance Costs
Homeownership comes with additional responsibilities, including maintenance costs. While renting typically shifts these responsibilities to the landlord, homeowners must budget for regular maintenance, repairs, and potential renovations.Capital Gain Taxes when selling the real estate again
Switzerland is known for its tax-free capital gains on private assets. However, there are a few exceptions to this rule. One is the capital gain on the sale of real estate. This is used to prevent speculation with properties that are already in the high-price segment. This means that gains on short-term holdings are taxed more heavily than long-term holdings. Thus the length of your stay in Switzerland matters.
Nevertheless, despite the high prices, higher responsibility, and lower flexibility you are facing purchasing real estate in Switzerland may pay off.
Real estate in Switzerland experienced a price increase during the last 25 years. According to the most recent Credit Suisse research apartment owners experienced a capital increase of 6.7% in 2021, 5.2% in 2022 and 0.5% in 2023. In the last 5 years, real estate prices increased by 18% on average (inflation-adjusted). In such a scenario, a real estate owners have had CHF 360’000 more in their pockets after interest rate payments, maintenance costs and taxes paid on capital gains, based on a 5.5 years holding period in the Canton of Zug.
Considering risks
When debts such as a mortgage are needed for consumption, a risk evaluation is a must. There was a time in Switzerland when real estate prices depreciated sharply. This real estate crisis in the early 1990s was preceded by a rapid rise in real estate prices in the 1980s, followed by an overvaluation of the market. When prices began to fall, many households and banks came under pressure. The crisis led to a recession and forced the Swiss government and central bank to take measures to stabilize the economy.
In such a scenario, real estate owners forced to sell their house, may lose more than the invested money. This happens when the market falls more than the percentage of their real estate portion. If market prices drop 30% and the houseowner has 20% capital equity of the house, 10% will have to be taken out of the private pocket to satisfy the bank.
Conclusion
The decision to rent or buy in Switzerland involves a careful consideration of personal preferences, financial capabilities, and long-term goals. Renting offers flexibility but may be financially unrewarding in the long run, while buying a house provides equity and potential appreciation of the private wealth, but it also includes risks a real estate owner needs to balance carefully.
