Buy or rent a home in Switzerland - Google sheet

[kimberlykay]

Ok, as a resolution for 2022, let me try to make the decision whether to buy or rent a home in Switzerland a bit more rational. With price to rent ratios typically above 30, I find it really hard to justify buying real estate in our beautiful country. I have tried to adjust a model from Holy Potato, which is focused on Canada, to Switzerland real estate market specifics – inputs heavily borrowed from:

• http://www.holypotato.net/?p=1073
• https://affordanything.com/is-renting-better-than-buying-should-i-rent-or-buy/
• https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Let us assume:

• I currently pay CHF 3.200 rent per month
• I am considering to buy a single-family home for CHF 1.4 million
• A swiss bank offers me a 1.1% to 1.3% mortgage (first 5 y 1.10%, next 5 y 1.20%, final 20 y 1.30%)

From a purely financial perspective, does such an investment make sense? The answer is: It might - depending on some further important assumptions! Please share your thoughts on the following key assumptions – would love to get some input from financial pros in this sub:

• Will the rent increase? Rent increases are not straightforward to enforce for a landlord in Switzerland. I modelled no increase in the first 5 years, followed by 0.8% increase in the following 25 years.
• What is the annual investment return of the money put to work in the renting case? I assumed 6% annual return. I am aware that a 60/40 portfolio historically delivered higher returns, but I am skeptical about the future due to 1) low returns on bonds due to low interest rates 2) cost of currency hedging and/or lower returns of swiss equities (home bias). Does anyone have a source of historical returns of a CHF-hedged globally invested 60/40 portfolio?
• Will Swiss house prices further appreciate? I modelled 2.25% annual increase based on this: https://www.ceicdata.com/en/indicator/switzerland/house-prices-growth Does anyone have better sources?
• What will be costs of maintenance, tax and insurance for a home owner? I modeled total annual costs of 1.1% of the current house value. Reasonable?
• Finally, when I sell the house, how much do I have to put up for the sale process (broker fees, mortgage penalty etc.). I assumed 4% of the current house value. Not sure about mortgage penalties - any thoughts?

With these assumptions, it makes sense to buy the house in case I plan to live in it between 5 and 20 years. To me, that’s a bit of a surprise frankly but it seems to explain why we see these enormous prices in the real estate market. Please discuss the key assumptions above and let me know where I am wrong.

Below is the link to the model as google sheet.

https://docs.google.com/spreadsheets/d/1Xim19dXs-aGE74KmPIVX1k6OyePR7xa3AEmLukEVk1s/edit?usp=sharing

UPDATE: Thank you all for the constructive feedback. I got a good pointer to the Mustachian forum (https://forum.mustachianpost.com/t/clarification-on-buying-vs-renting/3589/43 ) and I found another Google sheet here https://docs.google.com/spreadsheets/d/13LT9HDL32FHw1CIZ7dLnoGCqRCvmCPWsrqjuQkUuyiA/edit?usp=sharing . I entered the same values got very similar results. My bottom line is: The biggest drivers (largest sensitivities) for the buy vs rent decisions are expected real estate price growth (RE growth), expected maintenance cost of the owned property (MC) and the expected returns of invested assets (RIA, in the rent scenario).

RE growth: If you take more pessimistic historical assumptions like Gerd Kommer at 0.9% (https://www.gerd-kommer-invest.de/wp-content/uploads/20190715-Tages-Anzeiger.pdf) then buying is immediately off the table. People often forget that there was a big real estate crisis in Switzerland in the 90ies. On the other hand, even at 1.75%, it can make sense to buy if you have a new building (low maintenance).

MC: New buildings have low costs (fair to assume 0.7%) but old buildings typically have 1.5%. This is a very important factor.

RIA: I keep my assumption at 6% as described earlier, but if you go down to 4% (conservative portfolio plus negative currency effects due to CHF appreciation), then buying is suddenly attractive again.

 

[keubadicon]

@kimberlykay I think I am somewhat qualified to answer at least some of your questions, as I worked at a bank for a couple years and am right now studying Banking & Finance.

- 1.10% - 1.30% for a 5 year mortgage seems quite high to me. This range would probably be more accurate if we are talking about a 10 year mortgage. For a 5 year one, you could probably expect something closer in the 0.95% area. Although it depends on how well the bank/institution rates your creditworthiness (that's a whole different topic tho).

-Firstly, it highly depends on where you are buying/renting your house. If it's around Zurich or in some hidden valley in Graubünden. There is a good chance that we are in a housing bubble right now, but that doesn't mean that the market can't continue it's growth for another 30+ years. Even with inflation on the rise, it doesn't seem to me that the SNB wants to increase interest rates, so I will assume that they will stay "somewhat" flat. With those facts set, I think we will continue to see increases in rent, but it might slow down a bit more that previously.

-In my personal believe, I don't think that bonds in the current market are still worth it. Either you are going to have to go down to companies rated in the BB area, other currencies or you will earn close to nothing. US Bonds for example still have decent interest rates (with some possible rate hikes in 2022), but either exchange rate losses or hedging cost might eat those up. So I prefer stocks, which have historically seen an average increase of about 8% per year.

-Nobody knows if house prices will continue to go up, there are indicators for and against it (see point 1). Even if you assume that they will continue to rise, it depends where the house is. Some areas might see their value drop, others might seem to shoot up 10%. Nobody knows in the end.

-For normal houses/apartments banks will usually calculate about 0.7% of the house price as cost for maintenance, tax (don't forget you can deduct the mortgage as debt) and insurance. Banks usually calculate for more than it probably is, so I think 0.7% is fair enough.

-Mortgage penalties are quite high (unless you can transfer it to the person that buys your house (stays at the same bank)). Usually it's the entire rest of the interest (until the mortgage runs out) + some other costs. If you assume that you are going to sell your house within the next couple years. It makes sense to only renew the mortgage to 2 years, so the penalties won't hit you that hard. (or you pay your mortgage off)

 

[kimberlykay]

@keubadicon

- 1.10% - 1.30% for a 5 year mortgage seems quite high to me. This range would probably be more accurate if we are talking about a 10 year mortgage. For a 5 year one, you could probably expect something closer in the 0.95% area. Although it depends on how well the bank/institution rates your creditworthiness (that's a whole different topic tho).

Good point. I assumed a mixed mortgage, for the 15 year part, a higher interest rate would apply.

-In my personal believe, I don't think that bonds in the current market are still worth it. Either you are going to have to go down to companies rated in the BB area, other currencies or you will earn close to nothing. US Bonds for example still have decent interest rates (with some possible rate hikes in 2022), but either exchange rate losses or hedging cost might eat those up. So I prefer stocks, which have historically seen an average increase of about 8% per year.

Fully agree here as well, was just referencing the 60/40 portfolio as it is apparently considered a standard portfolio. Regarding the 8% stock market return - that would need to be CHF hedged as well. The swiss franc as continuously appreciated vs the USD - not sure if the SNB can really fight against this in the long term. Thats why I took 6% in my model.

-For normal houses/apartments banks will usually calculate about 0.7% of the house price as cost for maintenance, tax (don't forget you can deduct the mortgage as debt) and insurance. Banks usually calculate for more than it probably is, so I think 0.7% is fair enough.

Thanks, so my 1.1% is actually conservative.

-Mortgage penalties are quite high (unless you can transfer it to the person that buys your house (stays at the same bank)). Usually it's the entire rest of the interest (until the mortgage runs out) + some other costs. If you assume that you are going to sell your house within the next couple years. It makes sense to only renew the mortgage to 2 years, so the penalties won't hit you that hard. (or you pay your mortgage off)

This is an important point, thanks for flagging.

 

[ditzydollshana]

@keubadicon

-For normal houses/apartments banks will usually calculate about 0.7% of the house price as cost for maintenance, tax (don't forget you can deduct the mortgage as debt) and insurance. Banks usually calculate for more than it probably is, so I think 0.7% is fair enough.

Which bank? AFAIK Credit Suisse considers 1.0%.

 

[keubadicon]

@ditzydollshana I don't really want to reveal where I worked at. There were houses where it was 1%, but those were usually stuff like Farmhouses, Apartment buildings, etc.

Banks do have some different rules around these things, for example some banks calculated your creditworthiness with your Gross income and others with Net income

 

[ulkon]

@keubadicon What's mortgage penalty

 

[keubadicon]

@ulkon I'll try my best to explain it as simple as possible.

Let's say you have a mortgage on a house. You owned this house for now 20 years and finally want to sell it. But 2 years ago you refinanced it for 5 years and 0.80% interest. Theoretically you still have 3 years until your mortgage "runs out". So the bank is kinda pissed (not actually). They say "we have a contract saying that you keep your mortgage with us for 5 years and only 2 years have passed since then, we want compensation". Because what you did is theoretically speaking breaching our contract

Now as a penalty for closing the contract early, you will have to pay them a certain amount of money.

Hope this makes it more clear, if not, just tell me what you don't understand exactly

 

[purchasedpossession]

@keubadicon If I understood correctly, the penalty is the amount of missed 3 years of interest + a fee?!

That's absurd, since then it makes zero sense to close the mortgage prematurely since it would cost more that way than just leaving it as it is.

It's not breaching a contract if contract says the terms for premautre closing, eg fees.

I mean, fees are common, but this is the first I've heard they're the same as regular interest would be...
In Germany it is a percentage of the main amount, but significantly lower than it would you spend if you keep the loan. In Croatia the same.

So maybe some poor wording on your side? In short, can you extend your example with all numbers, so, loan amount, total interest paid so far, total interest and capital left to pay, and how much would fee be.
By your feeling (I know you don't know exact numbers, but some ballpark), just to have clear picture?

 

[keubadicon]

@purchasedpossession I was a bit tired when I wrote this, the thing about breach of contract you are 100% correct. That was poorly worded.

About the other part with amount of missed interest + fee is correct. Depending on the bank they might make reductions for how much they could reinvest the money for, but not all of them do it.

I understand your point of view that it wouldn't make sense. But you have to see it from a different side. When selling a home, you have to move somewhere else. If you for example want to buy a different house, you have to pay down your current mortgage. You can't wait for another 3 years. Additionally, you will have some problems with the borrower's note, but I don't want to get into detail. That's why when people plan to sell the house, they usually get a variable mortgage, which they can close at any moment. Or the usually pay it down to a low amount (Most mortgages that got paid prematurely were around 100'000 - 250'000) where the penalty would obviously be much lower

As for the numbers, I'll give you a hypothetical one

House: 1'000'000

Mortgage: 400'000

Loan duration: 3 years (1 year remaining)

Interest: 0.65%

Interest would be 2'600, Penalty would probably be around 300 and reductions could come out to 150. That would give us (extremely roughly) 2'750 Fr. that would need to be paid

 

[ditzydollshana]

@kimberlykay

Let us assume:

I currently pay CHF 3.200 rent per month

I am considering to buy a single-family home for CHF 1.4 million

A swiss bank offers me a 1.1% to 1.3% mortgage (first 5 y 1.10%, next 5 y 1.20%, final 20 y 1.30%)

From a purely financial perspective, does such an investment make sense?

Perhaps you have already watched these:

Assuming that there isn't a drastic change on interest rates and legislation, and considering a +15-year scenario, renting is financially more advantageous than buying. Additionally, buying potentially represent a much higher risk because if interest rates change, it can only go up.

Will the rent increase? Rent increases are not straightforward to enforce for a landlord in Switzerland. I modelled no increase in the first 5 years, followed by 0.8% increase in the following 25 years.

Take a look at this:

https://www.bfs.admin.ch/bfs/en/home/statistics/construction-housing.assetdetail.15104276.html

The average rent increase in canton Zürich for a 4-room apartment was just ~6% in 10 years (2010-2019), or ~0.6% on average per year. However, there was a clear spike in the CPI due to inflation in the last 24 months:

https://tradingeconomics.com/switzerland/cpi-housing-utilities

What is the annual investment return of the money put to work in the renting case? I assumed 6% annual return. I am aware that a 60/40 portfolio historically delivered higher returns, but I am skeptical about the future due to 1) low returns on bonds due to low interest rates 2) cost of currency hedging and/or lower returns of swiss equities (home bias). Does anyone have a source of historical returns of a CHF-hedged globally invested 60/40 portfolio?

From Jan 2007 to Nov 2021 (in USD)

- 60% Vanguard Total Stock Market ETF (VTI), 40% 20+ Treasury Bond ETF (TLT): +10.07%

- 100% Stocks (VTI): +10.48%

Will Swiss house prices further appreciate? I modelled 2.25% annual increase based on this: https://www.ceicdata.com/en/indicator/switzerland/house-prices-growth Does anyone have better sources?

Again, depends on the legislation. What really is putting a celling on the housing prices in CH is the 5% stress test rule. If they scrap it or ease it, housing prices will shot up because supply has been extremely limited in the last 10 years.

What will be costs of maintenance, tax and insurance for a home owner? I modeled total annual costs of 1.1% of the current house value. Reasonable?

Banks consider 1.0% only for maintenance, so your estimate is low.

Finally, when I sell the house, how much do I have to put up for the sale process (broker fees, mortgage penalty etc.). I assumed 4% of the current house value. Not sure about mortgage penalties - any thoughts?

Seems resonable. Plus capital gains tax:

https://www.credit-suisse.com/ch/en...erkauf-diese-steuer-ist-zu-zahlen-201901.html

With these assumptions, it makes sense to buy the house in case I plan to live in it between 5 and 20 years.

Something is wrong on your assumptions.

To me, that’s a bit of a surprise frankly but it seems to explain why we see these enormous prices in the real estate market. Please discuss the key assumptions above and let me know where I am wrong.

Below is the link to the model as google sheet.

https://docs.google.com/spreadsheets/d/1Xim19dXs-aGE74KmPIVX1k6OyePR7xa3AEmLukEVk1s/edit?usp=sharing

The capital gains tax on a portfolio is 0%. Your only tax will be wealth tax, which is relatively low in Switzerland.

Anyway, from a financial stand point, it's better to rent than to buy. In the 15-20 year period, you will have a higher net worth by doing so. HOWEVER, the value of living in your own house, with the freedom to do whatever you want with it, is priceless.

As I mentioned earlier, take into account that the risk in buying is higher due to interest rates.

 

[kimberlykay]

@ditzydollshana Great feedback, thanks a lot!

Perhaps you have already watched these:

Assuming that there isn't a drastic change on interest rates and legislation, and considering a +15-year scenario, renting is financially more advantageous than buying. Additionally, buying potentially represent a much higher risk because if interest rates change, it can only go up.

I like the spirit of the videos and I agree with many points. The intention of the model I published was to allow a more specific conclusion than the blanket "5% rule" mentioned in the video. I think given the swiss specifics (ability to deduct imputed rental value etc.), the rule of thumb in the swiss case is likely going to be well below 4%, perhaps 3.5%. I agree with the interest rate risk though.

Take a look at this:

https://www.bfs.admin.ch/bfs/en/home/statistics/construction-housing.assetdetail.15104276.html

The average rent increase in canton Zürich for a 4-room apartment was just ~6% in 10 years (2010-2019), or ~0.6% on average per year. However, there was a clear spike in the CPI due to inflation in the last 24 months:

https://tradingeconomics.com/switzerland/cpi-housing-utilities

Super helpful, thanks. I have included this in my model.

From Jan 2007 to Nov 2021 (in USD)

- 60% Vanguard Total Stock Market ETF (VTI), 40% 20+ Treasury Bond ETF (TLT): +10.07%

- 100% Stocks (VTI): +10.48%

Do you have CHF hedged data as well? My point is that in the same period, the swiss franc appreciated around 40% in value - this massively cuts into your Vanguard performance when you live in Switzerland, hence i used 6% annually rather than 10%.

Anyway, from a financial stand point, it's better to rent than to buy. In the 15-20 year period, you will have a higher net worth by doing so. HOWEVER, the value of living in your own house, with the freedom to do whatever you want with it, is priceless.

As I mentioned earlier, take into account that the risk in buying is higher due to interest rates.

Agree with the interest rate risk, but how do you arrive at your conclusion that renting is better? Which numbers do you use?

 

[lostgirllikereallylost]

@kimberlykay 1.1% seems quite high to me, I'd also consider pension funds and insurance companies (or a good broker that works with all of these companies). I got a 5 y 0.65% mortgate some months ago.

Furthermore, mortgate penalties can be circumvented easily, so I would not consider them. When you know that you want to sell the house in the next years, you can use contracts with a short duration (or even variable mortgages when you are actively selling the house). Broker fees heavily depend on the canton, there are comparisons in the internet.

For a complete calculation, you should also consider the "Eigenmietwert" which changes your tax situation (for the worse) when buying a house.

In the end, this was still somewhat a gut decision for me, because there are so many unknowns (house price appreciation, portfolio returns, political decisions, etc...). Owning a home has other positive effects for me (I can change everything, I cannot be terminated suddenly, when I travel for a longer time I don't feel bad because of wasted rent, ...) and I see it as a further diversification of my portfolio. A potential middleground is owning with indirect amortization and investing this money.

 

[kimberlykay]

@lostgirllikereallylost Thanks for this, makes sense.

Furthermore, mortgate penalties can be circumvented easily, so I would not consider them. When you know that you want to sell the house in the next years, you can use contracts with a short duration (or even variable mortgages when you are actively selling the house).

I guess the tradeoff that shot duration mortgages have is that you increase your risk profile when SNB pulls the trigger and increases rates.

In the end, this was still somewhat a gut decision for me, because there are so many unknowns (house price appreciation, portfolio returns, political decisions, etc...).

That's exactly my learning. The two biggest financial drivers are house price appreciation and portfolio returns, then followed by house maintenance costs. In other words, when you buy a house, you are at the mercy of the SNB, which is itself somewhat at the mercy of the world economy. On the other hand, when renting, the portfolio returns are also at the mercy of the world economy, but you are less levered.

 

[eloise]

@kimberlykay Why no mention of the fact that rental money is never again seen? When you sell the house at least you have worked on paying the principal down and that combined with the appreciation value means you end up in the positive long term where as in renting you are in the negative, and by a significant margin.

 

[wondering098]

@kimberlykay That's very interesting! Thank you so much for the spreadsheet. Unfortunately I'm probably the wrong guy to answer though, but have you tried posting this in the forum of Mustachianpost. While I do not always agree with some of their politics, they do know their stuff when it comes to FIRE and Swiss Finance and it's a much more active forum than this here. Usually someone will respond in a matter of minutes.

 

[kimberlykay]

@wondering098 Thanks, I will post there as well.

 

[ulrike]

@kimberlykay Buying a home will almost always be a terrible investment from financial point of view but could be a very good one emotionally.