Credit Suisse: Residential Property Prices: The End of an Era Donnerstag, 08. Juni 2017 - 09:30
The 14-year era of rising prices for residential properties appears to
be over. Over the next few quarters, real estate economists at Credit
Suisse expect prices to stagnate. Single-family dwellings ought to
outpace condominiums in terms of price growth. The real estate experts
at Credit Suisse also show how real estate marketing is being
revolutionized by augmented and virtual reality. What appears at first
glance to be little more than a digital game has longer-term potential
to lower transaction costs and reduce risks for property developers. Those who rely on property valuations are also confronted with risks.
The Credit Suisse economists introduce a method that can quantify
possible deviations from estimated values, providing investors with
additional information.
The days of constant upward movement in residential property prices are a thing of the past. At the end of 2016, prices for owner-occupied housing were for the first time lower than they had been a year earlier. The increasing prices lasted an extraordinarily long 14 years. High price levels and stricter financing requirements have allowed fewer and fewer Swiss households to fulfill their dream of home ownership. As a result, demand has fallen and price growth has come to a standstill. Real estate economists at Credit Suisse are consequently expecting prices for owner-occupied residential properties to stagnate over the next few quarters. Against the backdrop of surging prices in the past and fears – more audible since 2010 – of another real estate crisis in Switzerland, the latest development seems made to order from a regulatory point of view. Approvals of mortgage loans have also decelerated. Despite record-low interest rates, growth in mortgage volumes is as low today as it was at the end of the 1990s when the long-term price rally was just beginning to take off.
Price Trend: Single-Family Dwellings Have the Advantage
For many years, prices for condominiums posted bigger increases than single-family dwellings. That is no longer the case. Over the past four quarters, prices for condominiums in the medium segment in Switzerland have fallen significantly while price growth for single-family homes in the medium segment is still just inside positive territory. The real estate specialists at Credit Suisse have identified the shift in demand for housing from the overly expensive centers to peripheral regions, and a lack of demand from borderline households as the main reasons for this change in the underlying situation. The lower demand for owner-occupied housing is also reflected in fewer projects to build condominiums. Over the past 12 months, there have been 18% fewer condominiums approved for consruction than in the same period last year.
Real Estate Is Getting Mobile
Digitalization is also having an increasing impact on the real estate industry. It is changing corporate business models along the entire value chain from property construction to management. For instance, real estate marketing is undergoing a total transformation – thanks to the use of augmented and virtual reality. A combination of video, photography, and 3-D rendering makes the creation of virtual worlds possible. This enables interested parties to view properties at any time, eliminating travel time and expenses for customers and brokers. The real estate specialists at Credit Suisse see huge opportunities in these technologies. The real estate market could become one of the most lucrative areas for the application of virtual reality.
Ignoring Uncertainty in Property Valuation Poses Risks
Thanks to enhanced computer performance and more user-friendly programs, the options for calculating property valuations are also changing. In the discounted cash flow (DCF) method typically used for real estate, the uncertainty attached to the forecast inputs is ignored for the sake of simplicity. The resulting property valuation thus pays too little heed to these uncertainties, and provides a mere perception of certainty. Using Monte Carlo simulations, the real estate economists from Credit Suisse have introduced a computer-aided method that can factor in thousands of different scenarios and generate estimated values in the form of a distribution. The resulting information about possible deviations from the expected value helps investors to better assess the risks.
Figure: Price Trends for Single-Family Dwellings More Stable
Change in transaction prices (medium segment) in Q1 2017 compared to the previous year’s quarter
Source: Wüest Partner, Geostat
The publication "Real Estate Monitor Switzerland for 2nd Quarter of 2017: The End of an Era" can be found on the internet at: www.credit-suisse.com/immobilien
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