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Swiss Real Estate Markets > Wüestacademy > Flashcards

Wüestacademy Flashcards

1
Q

What are the key drivers of real estate prices?

A
  • interest rates
  • supply & demand
  • construction cost etc.
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2
Q

What drives interest rates?

A
  • supply and demand
  • inflation
  • monetary policy
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3
Q

What is the role of interest rates for real estate prices?

A

Interest rates affect supply and demand which affect real estate prices: low interest rates -> higher demand -> higher prices

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4
Q

Average yearly price change 2008-2022 (condominiums, SFH, MFH, rents)

A

Condominiums, SFH, MFH: 3.5+%
Rents: 0.5%

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5
Q

When was the first interest rate hike since 2007?

A

June 2022

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6
Q

How was the Swiss policy rate in the last years?

A

It was negative for 7 years

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7
Q

How does the real estate market react compared to stock market?

A

With circa 1 year delay

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8
Q

4 submarkets in real estate

A
  • Asset market
  • Property market
  • Construction market
  • Building stock
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9
Q

Asset market

A
  • transactions
  • interest rate development
  • real estate specific risk
  • returns
  • regulation, mortgage lending, Lex Koller
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10
Q

Property market

A
  • households
  • population and employment
  • immigration
  • surface consumption
  • purchasing power, willingness to pay
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11
Q

Construction market

A
  • construction & refurbishment
  • availability of land
  • regulation, spatial planning
  • construction cost
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12
Q

Building stock

A
  • maintenance cost
  • depreciation
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13
Q

Summary of DiPasquale / Wheaton model

A
  • modeling interaction between property market, asset market, construction market
  • determination of long run equilibrium
  • elegant graphical representation
  • allows to perform comparative statics (effect of shock on market equilibrium)
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14
Q

Property market:
Rent results from…

A

…supply and demand for residential space

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15
Q

Asset market:
Price results from…

A

…willingness to pay for rental income

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16
Q

Define cap rate

A

The cap rate is the percentage rate used to calculate the income value from rental income.

The cap rate is formed from a base interest rate and surcharges, it is the percentage rate used to calculate the income value from rental income.

Income value =
net income (x100) / net cap rate %

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17
Q

Decisive for investments in real estate are…

A

… the attractiveness of alternative investments (bonds, stocks) and expectations of future developments.

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18
Q

When bond yields rise, real estate…

A

… less attractive in relative terms.

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19
Q

Construction activity depends on…

A

… construction cost and price.

20
Q

Construction investments are low despite high demand, because…

A

… of supply bottlenecks and construction price surge.

21
Q

Building stock depends on…

A

… new construction and depreciation rate

22
Q

When interest rates drop, longrun rent…

A

… decreases less than in short run

23
Q

When interest rates drop, transaction prices of MFH

A

…increase

24
Q

When interest rates drop, apartment construction activity…

A

… increases

25
Q

When interest rates drop, stock of apartments…

A

… increases

26
Q

When interest rates drop, rental prices of apartments at times of interest rate cut…

A

… stay the same

27
Q

When interest rates drop, rental prices of apartments after the lowering of interest rates (short-term adjustment)…

A

… decrease

28
Q

When interest rates drop, rental prices of apartments in the new equilibrium (long-term adjustment)…

A

… decrease

29
Q

How many years does adjustment process take (after drop of interest rates)?

A

7 years

30
Q

If a 10-year Swiss government bond yield rises by 100 basis points, in what chronological order would the individual segments react?

A
  1. discount rates
  2. prices for investment properties
  3. construction market
  4. supply on property market
  5. reference interest rate
  6. demand in property markets
31
Q

What happens (with rent) when population growth increases?

A

Rent increase in longrun is less than initially -> expansion along longrun supply

32
Q

Advantages of the DiPasquale / Wheaton model

A
  • model shows interaction of user market, capital and construction market
  • suitable for determining long-term market equilibrium
  • allows to analyse effects of shocks (interest rates, immigration, construction cost, depreciation)
  • simple framework can explain various real world developments
33
Q

Reasons for high RE prices in last years

A

High population growth, high demand, low interest rates

34
Q

Disadvantages of DiPasquale /Wheaton model

A
  • classical model does not allow analysis of short-term adjustments
  • capitalization rate is exogenous
  • no role for vacancy rates or market expectations
  • no distinction between rental and owner-occupied housing
  • no modeling of the search and matching process between suppliers and demanders

-> various extensions address these issues at the cost of simplicity

35
Q

What is interest?

A

Interest is the consideration paid by a debtor to his creditor for granting a loan, it compensates for the borrower‘s default risk, inflation risk and the time value of money

36
Q

High interest rates increase the willingness to…

A

… save because future returns are higher

37
Q

Low interest rates increase the willingness to…

A

… make investments, as financing is favorable

38
Q

Determinants of interest rates:

A
  • inflation: high inflation -> high interest rates to compensate loss of purchasing power
  • economy: strong GDP growth -> high interest rates
  • demographics: increase in life expectancy -> lower rates -> desire to save
  • monetary policy: price stability -> high interest rates slow down investment and thus economic development and inflationary pressure
39
Q

SNB policy rate

A

Indicates the conditions under which credit institutions can borrow money from the SNB

40
Q

SARON

A

Swiss Average Rate Overnight:
overnight interest rate between banks, moves closely to policy rate

41
Q

What drives government bond yields?

A
  • expected inflation
  • policy rate
  • financial market: investment pressure, risk aversion, savings vs. investments
  • other premiums, e.g. illiquidity
42
Q

Types of mortgage rates

A
  • SARON mortgage: term of 3 years with variable SARON as base rate with +0.9 bp margin
  • 10-year fixed rate mortgage
43
Q

Importance of interest rates for real estate prices

A
  • interest rates determine borrowing costs and thus influence demand for ownership property
  • interest rates influence the discount rate and thus the property value for owners
  • in an inflationary environment with rising wages and interest rates, rents typically rise as well
44
Q

What happens in the event of an inflation shock?

A
  • yields on bonds rise
  • policy rate rises
  • prices of investment properties fall
  • existing rents rise
45
Q

Bond yields follow…

A

… inflation movement

46
Q

Why have interest rates decreased
a) in general over the last 10 years
b) in 2020?

A

a) the SNB first imposed a negative interest rate of -0.75% in 2015 when it was forced to abandon a policy of defending the Swiss franc with a peg to the euro

b) because of the slowing economic growth related to Covid-19

Swiss Real Estate Markets (3 decks)

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