The real estate boom is reaching historic proportions

Homeownership prices have almost doubled. A notorious mark has been exceeded.

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The real estate boom has taken on imposing dimensions. It can now compete with its notorious predecessors (see graphic below). The average price increases for residential property were also no more extreme when the US experienced the biggest boom in its history before the financial crisis. Or when in Japan the floor under the Imperial Palace in Tokyo was valued higher than any real estate in California.

It all started with today’s boom around the turn of the millennium

These dimensions emerge from figures from the Bank for International Settlements. They show the price development of residential property after deducting inflation. “Switzerland on Sunday” has evaluated these figures with the Iazi consultancy. It remains to be seen whether the Swiss boom will also end in a crash and whether it will come close to its historical predecessors in terms of their destructive power.

It all started with today’s boom around the turn of the millennium. It was then that prices finally hit rock bottom. Before that, they had fallen a little deeper for ten excruciatingly long years. After 2000 things are going up: sometimes more, sometimes less steep, briefly interrupted in 2017, but otherwise incessant. But hardly anyone notices the turning point in 2000.

The bubble bursts on the stock exchanges around technology companies that should have ushered in a new era, but are only burning money. Some survivors later become global corporations, such as today’s online giant Amazon. Joanne K. Rowling publishes a new volume on Harry Potter. George W. Bush wins in court and becomes President of the USA. In Switzerland, the SVP could not push Christoph Blocher through at that time, Samuel Schmid became Federal Councilor. But today the boom cannot be overlooked.

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In the corona year, prices rise faster again

Prices have risen 89 percent in two decades. So you’ve almost doubled. And the boom shows no signs of weakness, the corona crisis cannot harm it. Most recently, the fastest price increase since 2012 was recorded.

At that time the boom was in a particularly fiery phase. The rules according to which banks grant their mortgages are even looser. The Swiss National Bank is busy, its president stumbles over his wife’s foreign exchange deals. Only later do the authorities succeed in forcing a change of mind. The banks tighten their self-regulation. Mortgages are lending more cautiously, less high prices are paid. But in the end the effect seems to wear off. In the corona year 2000, prices are rising as quickly as before.

With the latest price surge, the boom has finally made its way into the most famous and notorious examples of boom phases.

The US boom peaked in 2006. When it turns into a crash, the country falls into the “Great Recession” and takes the world with it. America’s banks have piled up complicated financial products on sub-class mortgages and sold them all over the world. In Switzerland, UBS has allowed itself to be seduced too much, the big bank must be bailed out by the state. Your President Marcel Ospel then retires into private life.

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In the Japanese boom, all relations get mixed up and high spirits spread. The book “Japan as Number 1: Lessons for America” tops the bestseller lists. The market value of Japanese real estate is twice that of all American real estate. After the crash, banks tumble, zombie firms roam, and the economy stagnates for nearly two decades.

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It is even more extreme in southern Europe than in Switzerland. When the euro was introduced, northern European investors believed in blooming landscapes in the south. A lot of money is flowing. In Spain prices are reaching dizzying heights. Then there is a financial crisis. The money is gone quickly. What remains are unemployment, debts and ghost settlements.

The equity is quickly gone

Donato Scognamiglio finds the price highs of Swiss residential property “terrifying”. The managing director of the real estate consultant Iazi is convinced that the Swiss boom will end at some point and prices will fall for a few years. How much that will be, what the consequences are – nobody knows, you can just play mind games about it.

“One thing is clear: there is a great deal at stake for an enormous number of people.”

For example, it is enough if home ownership loses an average of around 10 percent in value across Switzerland. Nice, if many mortgage borrowers had only half as much equity – or none at all, says Scognamiglio. You are particularly at risk if you have bought your home late in the boom and paid a lot. If the equity is halved, it is the bank’s turn. It can force customers to repay debts. But it does not have to be as long as the interest is paid. But interest rates could rise after that. Scognamiglio: “History shows that a lot can happen when a boom ends.”