The Swiss National Bank (SNB) raises the key interest rate by 25 basis points to 1.75 percent, which has a significant impact on the real estate market. The fifth interest rate hike in a row is not unexpected, but it has clear consequences. The prime rate affects interest rates on various financial products, including mortgages, loans, and bonds. Understanding the complexities is essential to making informed decisions.
Uncertainty on the markets
After four steps of an interest rate increase, the key interest rate was raised again by 0.25 percentage points. With this interest rate hike, the SNB is signaling that the inflation risks in Switzerland have not yet been averted. Inflation had eased from a peak of 3.5 percent last summer to 2.2 percent by May, but is still above the targeted range of 0 to 2 percent. Announced increases in electricity prices, rents and VAT suggest that inflationary forces will continue.
In the international financial markets, the leading central banks have recently made various decisions. While the U.S. Federal Reserve (Fed) temporarily paused last week, the European Central Bank (ECB) raised its key interest rates by another 25 basis points. These different approaches by central banks reflect their respective assessments and strategies for coping with the current complex economic conditions.
The impact of the prime rate on mortgages
The prime rate plays a crucial role in determining mortgage rates and has a direct impact on the real estate market. Banks follow the SNB’s key interest rate and adjust their mortgage rates for fixed mortgages accordingly. In the current environment with the new 1.75% prime rate, this means that interest rates are rising, which increases borrowing costs and may further dampen demand for real estate ownership. The SARON mortgage also follows the prime rate proportionally and will consequently increase. Under certain circumstances, this can mean that otherwise more expensive fixed-rate mortgages can suddenly be concluded at better conditions than a SARON mortgage.
It is becoming increasingly clear that many people can no longer afford real estate due to higher interest rates. In the past, many households have been “tempted” by record low interest rates to fulfill their dream of owning a home. If there are no reserves now, confronting the new financial situation can lead to challenging consequences. Potential buyers and owners are advised at this point to keep an eye on price developments and to find out what financing options are available. Careful planning in collaboration with experts, whether for budgeting or the planned sale of the property, is becoming increasingly essential.
Key Interest Rate and Inflation: A Complex Relationship
The relationship between the prime rate and inflation is complex and affects the real estate market. In Switzerland, inflation is measured by the national consumer price index (CPI) and, simply put, refers to the increase in the prices of goods and services over a given period. By raising the key interest rate, the SNB helps to dampen inflation by making lending more expensive and reducing demand. A cut in the prime rate, on the other hand, has a direct impact on demand for real estate due to the high weighting of around 25% of spending on housing. In particular, the increase in the reference interest rate on June 1, 2023, could lead to a further increase in general housing costs, as these can now be raised by up to 3% – which does not rule out the need for further action by the SNB.
The lower the key interest rate, the cheaper loans become. Although the population has more money available to buy goods and services when interest rates are low, this leads to an increase in demand, which causes prices to rise. If interest rates are increased, on the other hand, less money is available and demand falls. Accordingly, less is bought, which depresses prices.
Conclusion
In an environment of rising interest rates, the real estate market is becoming more confusing. The dynamic changes in the real estate market can be challenging for potential buyers, sellers and owners alike. You see rising interest rates and wonder how it might affect your decisions to buy, sell or hold a property. An increase in interest rates can make mortgages more expensive, increasing monthly payments and potentially limiting financing. This can influence buying decisions, especially when it comes to mortgages. Sellers:inside sometimes had to worry even less, because demand still exceeded supply. However, the real estate market will change in the short term in that demand for rental housing will increase even further. Owners should also be prepared for this.
Nevertheless, don’t let market conditions unsettle you. Remember that change is not always negative. It brings movement to the market and opens new doors. Although interest rates are rising in Switzerland, they are still considerably lower than in the EU or the USA, for example. Overall, it is important that both buyer:s and owner:s are well informed and seek professional advice to ensure they make decisions that best meet their individual needs and goals. Stay optimistic because safety is the key to any buying or selling decision.
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