How pension payments are making Swiss housing unaffordable

A motorway underpass means the gutting of this district in Zurich and the loss of more affordable apartments. © Keystone / Gaetan Bally

Under pressure to invest, Swiss pension funds are ploughing money into real estate, considered a safe and profitable option. As this drives up housing prices, however, desperate residents are fighting back through direct democracy.

This content was published on October 25, 2019

Building land in central Switzerland is scarce, and apartments and houses expensive, especially in cities. Without their parents’ support, younger people can barely afford to own their own home. For many, even rental accommodation in urban centres is unaffordable, and those with less resources are forced to the outskirts. People talk of gentrification.

At the same time, as demand for housing in cities and conurbations far exceeds supply, real estate and real estate securities are considered a safe and lucrative investment option. Many investors pile their money into bricks and mortar as they can’t make much profit with normal bonds, given the current low interest rates.

Again, this feeds the spiral and leads to ever-increasing real estate prices.

Why pensions make housing unaffordable

What does gentrification have to do with pensions? Quite a lot, in fact. In Switzerland, a certain amount of every employee’s salary is automatically paid into a mandatory pension fund, which then invests the money. Later in life, the employee gets the money back in the form of pension payments or capital for their retirement.

But pension funds need to find a secure investment for the large amounts of capital available to them through this “forced saving”, and so they’re fond of real estate.

And according to Thorsten Hens, Professor for Financial Economics at Zurich University, Swiss pension funds are under immense pressure to invest. 

“Prices for real estate tend to be higher in countries with capital-based pension funds like in Switzerland or the Netherlands than in countries with a pay-as-you-go system like in Germany,” he says.

In order to make a profit, more luxury dwellings are constructed, and existing houses are upgraded to yield higher returns. Hence, the Swiss market is increasingly flooded with high-end housing. And as tenancy laws protect tenants from frequent rent increases in Switzerland, relatively speaking a flat becomes cheaper the longer you live in it. For this reason, older people tend to pay less rent than the younger generation. 

In a nutshell: the money needed for pensions makes housing for young people more expensive.

The other side of the coin is, however, that if pension funds invest in overpriced real estate which young tenants are unable to afford, pensions for the future old generation are also at risk.

Is a crash looming?

The immense investment pressure has led to a boom in the construction industry, especially in suburbs and rural areas where space is available. However, this is not necessarily where people want to live.

“Like everywhere else in the world, there has been a trend towards moving to urban areas in Switzerland for many years,” says Hens. “I don’t expect this to change soon as people are less concerned about peace and quiet and are more interested in available services such as schools, hospitals, leisure facilities, etc.” 

Rental income returns have been slightly decreasing over the past few years. However, this has been offset by an increase in value. This will only change if interest rates rise, which is not foreseeable at the moment.

“Should interest rates rise again, it will mostly affect rural areas,” Hens explains. According to the UBS-Bubble Index, the Swiss property market is currently overheated. However, Hens assumes that if the market is not shocked by a sudden change in underlying conditions, the bubble won’t burst.

History repeating itself?

All this may sound strangely familiar to some Swiss living abroad. In 1985, Switzerland introduced the mandatory pension fund, which attracted new wealthy investors to the Swiss market. At the same time, banks were generously granting mortgages. People invested in real estate. And given immigration and the shortage of building land in Switzerland, nobody expected the trend to change.

But it did. In 1989, the Swiss National Bank increased its discount rate, while the government passed a law against real estate speculation. Additionally, regulations on how to invest were imposed on pension funds. Mortgage rates began to rise.

All this led to the bursting of the real estate bubble in the early 1990s: banks crashed, and Switzerland experienced depressing years of recession and a real estate crisis.

The phenomena of real estate speculation and gentrification are issues in cities around the world, as shown in the the new documentary "Push": 

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What makes Switzerland different?

Although gentrification is a global phenomenon, Switzerland differs from other countries in some ways.

In London and Manhattan, many luxury flats lie empty because the owners – mostly foreign companies – expect them to increase in value, which would more than compensate for lost rental income. In Switzerland, luxury flats also lie empty – but for the sole reason that nobody wants to buy or rent them. Laws protect against real estate speculation: for example, the quicker you resell a property, the more you pay in profit gains tax. Another law prevents foreigners from buying real estate on a large scale without living in it.

In other countries such as Italy for example, criminals drive up property prices because they launder illegal money through buying real estate. Hens says that even though money laundering laws are quite tough in Switzerland, there have been some cases in the past, such as a Bulgarian drug dealer, who reinvested the money he made from selling a few tonnes of cocaine into property in Montreux and Geneva, amongst other places.

Fighting back with direct democracy

However, all this upsets the proud souls of the Swiss. Before the real estate bubble burst in 1988, the nation had voted on an initiative against land speculation, which proposed allowing the purchase of a property for personal use only, or for providing affordable housing. Buying property as capital investment would have been illegal. The Swiss rejected this initiative.

Now, however, the Swiss Tenants’ Association has launched its “housing initiative”, due to come to a nationwide vote in February 2020. The initiative would oblige the government to promote the supply of affordable rented flats. At least 10% of the newly built flats should be owned by cooperatives and other non-profit housing associations, while public financial incentives for the renovation of housing must not come at the expense of affordable rental accommodation, the initiative demands.

The Swiss Tenants’ Association says accepting the initiative would protect scarce living space against speculation and pressure to make a profit.

“Energy efficient enhancements are important, but subsidising luxury renovations must not be allowed,” the initiators state on their website.

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