Reference interest rate about to reach a turning point: rents set to rise by 8 percent by the end of 2023

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Since the introduction of the mortgage reference interest rate, this has fallen steadily. This is now set to change: According to UBS, tenants can expect the first rent increase at the beginning of next year – prices could rise by up to 20 percent by the end of 2025.

First turnaround in reference interest rate expected

The mortgage reference interest rate was launched in 2008 with the aim of harmonizing rents across the country. Since then, rents have been based on this reference rate – and so far there has only been one direction in its development, downwards: since its inception, it has fallen from 3.50 to 1.25 percent.

But in a analysis published earlier this week UBS assumes that there will now be a turnaround: due to inflation and rising interest rates, the experts expect the reference interest rate to rise by a quarter of a percentage point for the first time in March 2023, with a further increase likely in September 2023.

In its forecast, UBS assumes that the Swiss National Bank (SNB) will once again tighten the interest rate screw, which will make money market mortgages half a percentage point more expensive in December 2022. At the same time, the big bank expects long-term mortgage interest rates to remain stable in the coming months.

What does this mean for rents?

If the increase in the reference interest rate expected by UBS occurs in March 2023, landlords could demand higher rents from July 2023. Tenants must therefore expect higher basic rents in addition to the already rising ancillary costs. If the inflation adjustment is disregarded, rents based on the current reference interest rate are likely to be increased by 6 percent at the end of 2023 in accordance with tenancy law.

“At the same time, the accumulated inflation of 40 percent since the last rent adjustment can also be passed on to rents,” write the UBS experts. In concrete terms, this means that landlords could initially raise rents by 4 to 5 percent in view of rising inflation – and in a second step by 7 to 8 percent by the end of 2023.

But that’s not all: in its analysis, UBS assumes that the mortgage reference interest rate could level off at 2.5 percent in the long term. This would mean that rents could be increased by 20 percent by 2025, depending on the rate of inflation.

Only some of the rental agreements affected

What at first sounds like a hard pill to swallow for all tenants will in reality only become a reality for a minority. According to UBS, only around 20 percent of tenants have exercised their right to a rent reduction following the previous reductions in the reference interest rate.

So if the rent has never been reduced, it cannot be increased now. In addition, not all landlords are allowed to increase prices, as “tenants’ financial leeway has already been narrowed by the increase in ancillary costs”, according to the experts.

Is the end of the reference interest rate approaching?

Finally, UBS concludes in its forecast that the mortgage reference interest rate would probably be increasingly called into question in the event of such an upward movement. A reform or even abolition is therefore quite possible in the foreseeable future.

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